Must-Read: Joe Gagnon: Negative Interest Rates: A Useful But Limited Tool

Posted on by Brad DeLong

Must-Read: There is a debate that may be semantic and may be substantive with respect to whether a higher inflation target is in some sense a “policy” or a “tool” or not. I find myself of more than two minds about this. But by not including it on his list of things he prefers to negative interest rates alongside QE, Joe Gagnon implicitly reaches the conclusion that monetary régime change is not on the menu:

Joe Gagnon: Negative Interest Rates: A Useful But Limited Tool:

The disadvantages of paper currency are not so large as to allow for unlimited negative interest rates….

The Geneva Report shows that for negative rates down to -0.75 percent, there is little evidence of any large-scale shift into paper currency. But, especially if rates are expected to stay negative for a long time, there may not be a lot of room to cut further before triggering such a shift, which would mark the true lower bound on interest rates. Overall, it appears that other policies, notably large-scale asset purchases or QE, offer greater opportunities for monetary stimulus if and when it is needed.

Must-Read: Mauro Boianovsky: Knut Wicksell, Secular Stagnation, and the Negative Natural Rate of Interest

Posted on by Brad DeLong

Must-Read: Thinking of monetary policy as matching the market rate of interest controlled by the Federal Reserve to some underlying Wicksellian “neutral” rate that produces full-employment stable-price equilibrium was introduced, or reintroduced, into the American macroeconomic policy discussion by Alan Greenspan in the early 1990s. But, as Mauro Boianovsky points out here, that way of framing the issue is Wicksellian–but it was not quite Knut Wicksell’s way:

Mauro Boianovsky: Knut Wicksell, Secular Stagnation, and the Negative Natural Rate of Interest:

The notion of secular stagnation is consistent with… [Knut Wicksell’s] hypotheses of diminishing returns to technical progress and to capital accumulation alike….

The concept of “dynamic equilibrium” applied to the “past one hundred years”, when the economy was anything but stationary…. [But] diminishing… population growth and (capital-intensive) technical progress led the Swedish economist to consider… [a] stationary state… revealed by recurrent cyclical depressions… close to Marshall’s “different world” of higher saving and few opportunities for investment, as indicated by his critical discussion of Böhm-Bawerk’s treatment of the first reason for the existence of interest….

Wicksell’s notion of a negative natural interest rate in depressions is only implicit…. In fact, he was generally shy of using the concept of natural (or normal) rate of interest in his discussion of the business cycle…. Wicksell’s notion of the natural interest rate as the (expected) marginal productivity of capital applies strictly to a capital structure in equilibrium: “The operation of the laws of capital depends upon the assumption of a constant adjustment of concrete capital goods in an endless repetition of the same process of investment and production. But this is only of practical importance in capital investment of relatively short duration”…. In periods of great industrial development… such equilibrium is conspicuous for its absence (p. 187). In the subsequent depression period, “there is plenty of circulating capital, but it is no longer profitable to convert it into fixed capital”…. Despite the theoretical problems entailed by the application of Wicksell’s natural rate of interest concept(s) to cyclical fluctuations, it is clear that he grasped the restrictions posed to the formulation of monetary policy in periods of relative economic stagnation…

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Must-Read: Roger Farmer (2014): Real Business Cycle Theory and the High School Olympics

Posted on by Brad DeLong

Must-Read: I think that the subtle Roger Farmer is mostly right here, but gets one key crucial detail wrong. He states that there are “permanent long-run shifts in the equilibrium unemployment rate caused by changes in the animal spirits of participants in the asset markets”. I am not sure that that is correct. What I do think is correct is this: there are permanent long-run shifts in the employment-to-population ratio caused by changes in the animal spirits of participants in the asset markets. (There are also permanent long-run shifts in the employment-to-population ratio caused by demographic, sociological, and cultural factors.) By focusing on the unemployment rate–now back to 4.9%–Roger, I think, unnecessarily weakens his case:

Roger Farmer (2014): Real Business Cycle Theory and the High School Olympics:

[Prescott’s] argument was that business cycles… are caused by the substitution of labor effort of households between times of plenty and times of famine…

A recession, according to this theory, is… a ‘sudden attack of contagious laziness’…. Keynesians disagreed. They argued that whatever causes a recession, low employment persists because of ‘frictions’ that prevent wages and prices from adjusting to their correct levels. The Keynesian view was guided by Samuelson’s neoclassical synthesis which accepted the idea that business cycles are fluctuations around a unique classical steady state. By accepting the neo-classical synthesis, Keynesian economists had agreed to play by real business cycle rules… accepted that the economy is a self-stabilizing system…. [So] they hey filtered the data and set the bar at the high school level. [But] Keynesian economics is not about the wiggles. It is about permanent long-run shifts in the equilibrium unemployment rate caused by changes in the animal spirits of participants in the asset markets. By filtering the data, we remove [that] possibility… have given up the game before it starts by allowing the other side to shift the goal posts. We don’t have to play by Ed [Prescott]’s rules…. The data do not look kindly on either real business cycle models or on the new-Keynesian approach. It’s time to get serious about macroeconomic science and put back the Olympic bar…

Must-Read: Manu Saadia: The Enduring Lessons of “Star Trek”

Posted on by Brad DeLong

Must-Read: The wise Manu Saadia makes the case for his belief that “The Next Generation” rather than “The Original Series” is the real Star Trek:

Manu Saadia: The Enduring Lessons of “Star Trek”:

There are two kinds of science fiction… us[ing] the trappings of the future to explore the present…

…and us[ing] the same sorts of artifice for the opposite purpose—to imagine foreign, even utopian, futures. The original “Star Trek” series was undoubtedly of the first kind. The present saturated it. For a show that purported to “boldly go where no man has gone before,” it was remarkably at home in the familiar, if turbulent, world of the nineteen-sixties…. “Balance of Terror,” for instance, meditated on the futility of the Cold War. “A Private Little War” was an unsubtle dig at America’s involvement in Vietnam. “Let That Be Your Last Battlefield” offered a clumsy dramatization of slavery and racial discrimination…. Tellingly, the original series was at its best when its cast engaged in good, old-fashioned time travel….

It is hard to overstate how much of a departure the “Star Trek” franchise’s eighties-and-nineties-straddling incarnation, “The Next Generation,” was…. [It] swung almost entirely toward the second, more cerebral form of science fiction. It had no anchor in the present, nor did it genuflect before America’s frontier myths. “The Next Generation” was wholesale utopia, a thought experiment on how humans would behave under terminally improved material circumstances. Civilization, and the future, had won….

In “The Neutral Zone,” a reverse-time-travel episode, cryogenically preserved twentieth-century humans awake on the Enterprise. One of them, a take-charge Wall Street tycoon, is particularly eager to reclaim his stock portfolio and his status as master of the universe. “People are no longer obsessed with the accumulation of things,” Picard tells him—and us, the audience—sternly. “We’ve eliminated hunger, want, the need for possessions. We’ve grown out of our infancy”…

Must-Read: Project Syndicate: Untruth or Consequences

Posted on by Brad DeLong

Must-Read: Project Syndicate is introducing a new fortnightly feature: trying to themselves aggregate the best explicit and implicit dialogues about the most important aspects of the world situation that are currently taking place in its pages. We wish them all the best of luck:

Project Syndicate: Untruth and Consequences:

In every corner of the world, governments are failing…

…to recognize the full implications of their policies, and experts are too confused, or inappropriately influenced, to provide clear and credible guidance. The result is a mixture of hubris and cluelessness that is consuming countries’ entire political establishments.

Must-Read: Gary Burtless: This Pessimistic Conclusion Does Not Correspond with Other Indicators

Posted on by Brad DeLong

Must-Read: People who say that America today is in aggregate poorer than it was in 2000–or in 2008-9–are almost surely wrong. Economic performance since 2000 has been depressing, but not depressing to that extraordinary a degree:

Census report of big jump in income is a little too good to be true Brookings Institution

Gary Burtless: This Pessimistic Conclusion Does Not Correspond with Other Indicators:

This pessimistic conclusion… does not correspond with other indicators…. Personal income statistics published by the Commerce Department… show healthier income gains in the 21st century compared with the… CPS survey…. GDP estimates [say] real U.S. money income per person increased almost 11 percent in the first six years of the current economic recovery…. The Census CPS… suggests that the income gain was less than one-third as large (3.3 percent versus 10.9 percent)…. The Census household survey suggests that virtually all the income improvement in the recovery occurred in 2015, the Commerce Department’s personal income statistics show sizeable income gains in four of the last five years. This gap between… the CPS survey and… the national accounts has persisted for more than a decade….

The Commerce Department’s income estimates in the national accounts are derived from income tax returns, earnings records maintained by the unemployment insurance system, and administrative records provided by government transfer agencies… are almost certainly more accurate in the aggregate than estimates based on household survey responses. Of course, the national accounts data by themselves provide us with no evidence about the prevalence of poverty, the distribution of income, or the trend in median income.  Only household survey data offer a guide to how income is distributed…. But if the household survey is giving us an inaccurate picture of the trend in average income, it is inevitably giving a distorted picture of the trend in income at many points in the income distribution…. The [CPS] survey findings are worth reporting on the front pages of the nation’s newspapers, [so] the data they rely on are worth checking against competing, and perhaps more reliable, sources of information.

Musings on “Just Deserts” and the Opening of Plato’s Republic

Posted on by Brad DeLong
Bradford delong com Grasping Reality with the Invisible Hand

Musings on “Just Deserts” and the Opening of Plato’s Republic:

Greg Mankiw Defending the 1% proposes what he calls the “just deserts” theory of social justice:

What you have gained and hold by playing by the economic rules is yours: social justice consists in not cheating or injuring people, and not being cheated or injured in turn.

This is an old theory: we see it first in the western intellectual tradition nearly 2400 years ago, in the opening of the dialogue that is Plato’s Republic. It is advanced by Kephalos…

The other participants in Plato’s dialogue, led by Sokrates, conclude relatively quickly that Kephalos’s argument–taken up by his son Polymarkhos–is unphilosophical, and thus unworthy of consideration by those who want to gain a deep and true understanding of the subject. For the rest of the dialogue, Kephalos’s position–that justice consists of getting one’s just deserts: not injuring or cheating people, and not being injured or cheated–is abandoned. The live positions are, instead,

  1. That “justice” does not really exist: it is merely a rhetorical weapon with which the strong control the weak.

  2. That justice consists of the right arrangement of human society, because a rightly arranged human society is an instrumental virtue that produces many many benefits.

  3. That justice consists of the right arrangement of human society, a good and worthwhile thing both because of the other benefits it produces and a thing very much worth having in itself.

Ever since Plato, moral philosophers have followed his lead–or, rather, the lead of the characters in his dialogue–in this dismissal of “justice is neither cheating nor being cheated”. But, as Obama CEA Chair Jason Furman pointed out to me, that cannot be completely right. First, justice as what Mankiw calls “just deserts” has enormous psychological resonance for human beings. To the extent that moral philosophy exists to account for an help us understand the morality we human beings do have, dismissing a very large chunk of our moral intuitions as wrong simpliciter is not very helpful. Second, given that human beings have a strong tropism toward Kephalos’s “just deserts” position–that justice consists of not injuring or cheating people, and not being injured or cheated–anyone who tries to set out what a rightly arranged society is without taking account of this strong human psychological tropism will almost surely fail.

My tentative ideas on this are unfinished, and probably wrong.

But I would suggest that we might be thinking about the fact that humans are, at a very deep and basic level, gift-exchange animals. We create and reinforce our social bonds by establishing patterns of “owing” other people and by “being owed”. We want to enter into reciprocal gift-exchange relationships. We create and reinforce social bonds by giving each other presents. We like to give. We like to receive. We like neither to feel like cheaters nor to feel cheated. We like, instead, to feel embedded in networks of mutual reciprocal obligation. We don’t like being too much on the downside of the gift exchange: to have received much more than we have given in return makes us feel very small. We don’t like being too much on the upside of the gift exchange either: to give and give and give and never receive makes us feel like suckers.

We want to be neither cheaters nor saps. It is, psychologically, very hard for most of us to feel like we are being takers: that we are consuming more than we are contributing, and are in some way dependent on and recipients of the charity of others. It is also, psychologically, very hard for most of us to feel like we are being saps: that others are laughing at us as they toil not yet consume what we have produced.

And on top of this evopsych propensity to be gift-exchange animals–what Adam Smith called our “natural propensity to truck, barter, and exchange”–we have built our complex economic division of labor. We construct property and market exchange–what Adam Smith called our natural propensity “to truck, barter, and exchange” to set and regulate expectations of what the fair, non-cheater non-sap terms of gift-exchange over time are.

But we face a problem: How do we enter into a gift-exchange relationship with somebody we will never see again? And we have a solution: a cash-on-the-barrelhead exchange. We devise money as a substitute for the trust that in this transaction one is indeed in a gift-exchange relationship, rather than a sap being taken by a grifter.
And on top of this we have constructed a largely-peaceful global 7.4B-strong highly-productive societal division of labor, built on:

  • assigning things to owners—who thus have both the responsibility for stewardship and the incentive to be good stewards…
  • on very large-scale webs of win-win exchange…
  • mediated and regulated by market prices…

There are enormous benefits to arranging things this way. As soon as we enter into a gift-exchange relationship with someone or something we will see again–perhaps often–it will automatically shade over into the friend zone. This is just who we are. And as soon as we think about entering into a gift-exchange relationship with someone, we think better of them. Thus a large and extended division of labor mediated by the market version of gift-exchange is a ver powerful creator of social harmony. This is what the wise Albert Hirschman called the doux commerce thesis.

Now it is certainly true that economists do not talk about this once. For example, in Books I and II of his Wealth of Nations, Adam Smith definitely does write as if self-interest mediated by exchange is at the foundation of the social order. But Adam Smith the moral philosopher (as opposed to Adam Smith the proto-economist attempting to disrupt the 18th century discipline of “political oeconomy”) does not believe that. And it is not true. People as economists conceive them are not “Hobbesians” focusing on their narrow personal self-interest, but rather “Lockeians”: believers in live-and-let live, respecting others and their spheres of autonomy and eager to enter into reciprocal gift-exchange relationships—both one-offs mediated by cash alone and longer-run ones as well. In an economist’s imagination, people do not enter a butcher’s shop only when armed cap-a-pie and only with armed guards, fearing that the butcher will not sell him meat for money but will, rather, knock him unconscious, take his money, slaughter him, smoke him, and sell him as long pig. Rather, there is a presumed underlying order of property and ownership that is largely self-enforcing, that requires only a “night watchman” to keep it stable and secure.

This extended pattern of independence is a very valuable piece of our societal capital.

Thus, given these psychological and institutional facts-on-the-ground, in my view any rightly arranged society has to successfully do all of:

  1. setting up a framework for the production of stuff…
  2. setting up a framework for the distribution of stuff…
  3. creating a very dense reciprocal network of interdependencies to create and reinforce our belief that we are all one society…
  4. and doing so in such a way that:
    • people do not see themselves, are not seen as, and are not saps–people who are systematically and persistently taken advantage of by others in their societal and market gift-exchange relationships.
    • people do not see themselves, are not seen as, and are not moochers–people who systematically persistently take advantage of others in their societal and market gift-exchange relationships.

Achieving these results is complicated and difficult, for reasons related to [the water-diamonds paradox][]. But I am now far afield, and need to get back to my main topic…

Cf., also:

Weekend reading: “the indispensable U.S. corporate income tax” edition

Posted on by Nick Bunker

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

The whole U.S. federal tax code could use a number of reforms, but the corporate income tax is particularly in need of a reboot. Reed College economist Kim Clausing lays out a defense of the tax and some suggestions for changes.

Job search is a two-way street: workers look for a job and employers try to find new employees. Yet the employer portion tends to get overlooked—and it shouldn’t because the intensity of employer job search impacts employment and wage growth.

Does the estate tax violate our sense of equity? A concern for equity might suggest that policymakers change the form of certain wealth taxes, but not their wholesale elimination.

Workers in the retail and service sectors are increasingly subject to erratic and unpredictable work schedules. New research looks at how these schedules may have an impact on the health of these workers.

We’ve all become more skeptical of mortgage debt after the bursting of the housing bubble. In light of calls to reduce the influence of debt in the housing market, how should we consider a new company offering equity investments in residential houses?

Links from around the web

Is something rotten with the state of macroeconomics? According to economist Paul Romer the answer is a resounding yes. In a new article, he claims that over the past three decades “macroeconomics has gone backwards.” [paulromer dot net]

A new report questions the interpretation and overall validity of the now famous “elephant chart” of global income growth. But the Financial Times’ Martin Sandbu shows that the criticism raises questions the original paper preempted and that the new analysis leads to similar conclusions as the original. [free lunch]

Derek Thompson notes a surprising trend in the U.S. labor market: the working poor are the workers with the most leisure time and the rich have the least. That’s the opposite of many, including famously John Maynard Keynes, would have expected. What’s behind these trends? [the atlantic]

Central bankers and many economists have been very interested in the natural rate of interest, or “equilibrium real rate of interest.” But what if this rate doesn’t exist at all? Eric Lonergan makes the case against r*. [philosophy of money]

Economists are studying inequality more and more these days and Alana Semuels noticed an interesting trend about some of the economists leading the way: they’re Europeans. [the atlantic]

Friday figure

Figure from “How intensely are U.S. employers looking for workers?” by Nick Bunker

Must-Reads: September 16, 2016

Posted on by Brad DeLong

Should Reads: