Must-Read: Once more: the importance of the zero lower bound in generating asymmetric risks, and the importance of asymmetric risks in generating a policy bias toward substantial easing. The reason is the same as the reason that you stand well out to sea when sailing from Point Arena to San Francisco…

Paul Krugman:: Prudential Macro Policy: Monetary:

It was easy to say what U.S. monetary and fiscal policy should be doing…

the indicated demand policy was pedal to the metal all the way–no need to worry about inflation, no reason to believe that deficit spending would cause any crowding out (in fact it would almost surely crowd in private investment, because such investment depends on demand.)… The right kept warning about a debased dollar, while the Very Serious People were obsessed with debt and deficits, so that in practice we didn’t do the obvious. But it was obvious.

Now, however, we’re arguably not too far from full employment…. Has the macro case for strongly stimulative policy gone away?… [On] monetary policy… uncertainty plays the central role…. Risks are asymmetric. Waiting too long [to raise interest rates] risks embarrassment and some cost of wringing out the extra inflation, but moving too soon risks long-term stagnation. Wait until you see the whites of inflation’s eyes!…

Must-Read: Back before 2008, too much conventional wisdom held that the state of the business cycle did not matter much for the standard of living of those who did not own much capital. If inflation was to remain constant over time, a high-pressure economy that pushed inflation up had to be offset by an equal and opposite low-pressure economy that pushed inflation down, and so there was no permanent first-order gain for the working class from working hard to try to improve stabilization policy performance.

This was, I think, always false. But now it is obviously false. It now seems very unlikely we will get any rapid growth of potential output without a high pressure economy. And, as Larry says: “Tight labour markets are the best social program.”

Lawrence Summers: The Progressive Case for Pro-Growth Policies:

Tight labour markets are the best social programme, as they force employers to hire the inexperienced…

In the late 1970s, I was taught… that the shares of US total income going to profits and to wages, and to the rich and to the poor, was constant. All of this has changed. It is totally appropriate that widening inequality and the associated stalling of middle-class living standards should become an urgent political issue…. [But] the single most important determinant of almost every aspect of economic performance [is] the rate of growth of total income…. More growth means more employment. And with the college-graduate unemployment rate only 2.5 per cent, the newly employed are disproportionately less educated and disadvantaged. It can hardly be an accident that the decades of maximum growth, the 1960s and 1990s, also saw the most rapid job growth and most rapid increase in middle-class living standards….

How, then, can growth be accelerated? In an economy like that of the US, the vast majority of job creation and income growth comes from the private sector. If the next president is lucky enough to preside over the creation of 10m jobs from 2017-20, more than 8m of them will surely come from businesses hiring in response to profit opportunities. The question is not whether business success is desirable. The question is how it can best be achieved. At a moment when capital costs are close to zero, the stock market is at a record high and businesses are earning record profit margins, we do not need to bribe businesses to make investments that now do not seem worthwhile to them. There is no case for reducing already low corporate taxes or removing regulations unless it can be shown that these have costs in excess of benefits. What is needed is more demand…. This is the core of the case for policy approaches to raising public investment, increasing workers’ purchasing power and promoting competitiveness. That such policies also contribute to fairness is not a reason to lose sight of the central objective of promoting growth. Often in economics there are trade-offs. But not always. We can and must promote both fairness and growth.

Must-Read: An acerbic take on the economics profession and Brexit, but based, I think, on a false premise. I believe that when the economists’ negative assessments of Brexit “will eventually be tested against reality”, it will turn out that the negative forecasts were not “meant as a scare story only” and will come true. That–if anyone remembers–will not “reduce the profession’s reputation among non-economists further”:

Eurointelligence: Economics Profession Doubling Down:

What [should] the response… be to the rise in economic populism[?]…

Tony Yates… encapsulates the problem almost perfectly, in an unintended way: it is hard to find a better example of the profession’s arrogance. Yates’ discourse presumes the presence of a right and rational choice–and that those who disagree with the position are illiterate. In particular, Yates talks about “perceived grievances”, and notes that Brexit was “voted for by the older, less educated, less skilled”…. He confuses politics and policies… assumes that people care about aggregates and averages, rather than about their own position. When your real income falls, as it has done for almost 40% of the UK population in the last ten years, then this is not a perceived grievance but a real one…. These people… are not necessarily irrational…. Yates castigates policies to address these grievances as a “sop response”. That may be so to the extent that some of these policies may be symbolic and superficial. But for sure we need to address the problems. 

We have before discussed the surprise expressed by some economists that no one is listening to them any more. There is a reason for this. The profession, which is very inward-looking, has failed to address its shortcomings after the financial crisis. And if this article is any way representative of the post-Brexit response of the economics establishment, it is doubling down. The profession is shocked by the Brexit vote partly because the forecasts about the long-term impact of Brexit will eventually be tested against reality. It was meant as a scare story only. And it will reduce the profession’s reputation among non-economists further.

Must-Read: Note that it is not so much inequality that backlash is a backlash to. It is, rather, disappointment with what were previously-thought to be reasonable expectations–the breaking of the social contract that you believe the market economy has made with you:

Kevin O’Rourke: Brexit Backlash Has Been a Long Time Coming:

Globalisation in general, and European integration in particular, can leave people behind… ignoring this… can have severe political consequences…

The historical record demonstrates plainly and repeatedly [that] too much market and too little state invites a backlash. Markets and states are political complements, not substitutes… [that was] the main point of my 1999 book with Jeff Williamson… based on late-19th century evidence. Then the main losers… were European landowners… competing with an elastic supply of cheap New World land…. Meanwhile, across the Atlantic, immigration restrictions were gradually tightened as workers found themselves competing with European migrants coming from ever-poorer source countries. While Jeff and I were firmly focused on economic history, we were writing with an eye on the ‘trade and wages’ debate that was raging during the 1990s….

In our concluding chapter, we noted that economists who base their views of globalisation, convergence, inequality, and policy solely on the years since 1970 are making a great mistake. The globalisation experience of the Atlantic economy prior to the Great War speaks directly and eloquently to globalisation debates today….

Politicians, journalists, and market analysts have a tendency to extrapolate the immediate past into the indefinite future, and such thinking suggests that the world is irreversibly headed toward ever greater levels of economic integration. The historical record suggests the contrary. Unless politicians worry about who gains and who loses,î we continued, ìthey may be forced by the electorate to stop efforts to strengthen global economy links, and perhaps even to dismantle them…. We hope that this book will help them to avoid that mistake–or remedy it.

This time it is not different….

For a long time, conventional wisdom ignored these rather large straws in the wind–after all, the Irish could always be asked to vote again, while the French could always be told that they couldn’t vote again. And so the show could go on. But now Brexit is happening, and the obvious cannot be ignored any longer…. What can be done?… This is where Dani Rodrik’s finding that more open states had bigger governments in the late 20th century comes in (Rodrik 1998)…. Huberman and Meissner 2009… showed that this correlation between states and markets was present before 1914 as well….

If the Tories had really wanted to maintain support for the EU, investment in public services and public housing would have been the way to do it. If these had been elastically supplied, that would have muted the impression that there was a zero-sum competition between natives and immigrants. It wouldn’t have satisfied the xenophobes, but not all anti-immigrant voters are xenophobes. But of course the Tories were never going to do that, at least not with George Osborne at the helm…. We will have to wait and see what the English decide. But there are also lessons for the 27 remaining EU states (28 if, as I hope, Scotland remains a member). Too much market and too little state invites a backlash. Take the politics into account…

The Missouri side of Kansas City produces a great deal in the form of service exports that flow outside of the lower Missouri Valley to the larger world There are the design and marketing services of Hallmark, there is H&R Block, there is Cerner. The Kansas side of Kansas City has no equivalent except for Sprint. In fact, with the decline of its part of aerospace and of manufacturing in general as an employer, the state of Kansas exports pretty much primary products: corn, wheat, soybeans, pork, beef, natural gas, and petroleum–plus, as an exception, transportation services from the rail tracks that bring so much from Long Beach to the United States east of the Mississippi.

All of these–even the petroleum–provide immense use value to their users. The workers of Kansas, blessed by their climate and natural resources, are pulling their fair share and more of the task of making useful commodities for humans.

But the market does not care whether what you produce is very useful. The market cares about two things only:

1. Is it scarce and hard to produce?
2. Do rich people have a substantial Jones for it?

If both of these are satisfied, you are prosperous. If not–well, then if what you make is very useful you have the water-diamond paradox that so exercised the political economists of the Enlightenment. The woman who carries you water from the stream provides you with something that is the most necessary of commodities: you will die in three days without it. The jeweler who sells you a rock is doing nothing but flattering your vanity: life can be lived as fully without as with diamonds. And yet the woman who brings you water from the stream must supplement her earnings by begging on the street for crusts of bread to stay alive, while the jeweler has a handsome house in Mayfair and keeps a coach-and-four.

The state of Kansas is in the position of the water-carrying woman in today’s global economy. The state produces things of enormous used value. But since the start of the 1920s its agricultural products have overwhelmingly been those in relative excess supply for which the marginal utility–and that is what determines the price and the market value–is much less than the use value, the total utility. For a while that pattern of what Raul Prebisch used to call “unequal exchange” was offset by general manufacturing and aerospace. But no longer.

The fact is: If Kansas had to survive on the free-market value of its exports, its total economy would be only half the size that it is. Kansas as we know it is kept afloat by:

• Farm subsidies
• Social Security (and, no, this generation of retirees didn’t pay for all their Social Security benefits)
• Medicare
• Medicaid
• Health Exchange subsidies
• The location of the 1st Infantry Division at Ft. Drum Riley (even though the Comanche are no longer a serious national-security threat)

Why do these money transfers into Kansas exist? They exist because we here in America are social democrats. We in America believe that the citizens of Kansas are Americans. We do not believe that your value is determined, even if you work as hard as you can and no matter how useful what you make is, by whether or not the stuff your region specializes in is scarce and hard to produce and whether or not rich people have a substantial Jones for it. We think that the large redistributional part of Social Security, that the federal government health programs, and that even the farm subsidies are part of the citizen’s share: something that is yours by right as a citizen and a member of the very prosperous American economy. We do not think that people–or at least our citizens–who produce useful commodities should shut up and be poor if it happens that world market forces make the free-market value of what they produce vastly less than the use value.

You would think, given all this, that the good white citizens of Kansas would be the staunchest social democrats around–that they would send politicians to Washington who would strongly argue that a market economy is fine in its place, but that a market society is not; that while it is useful for incentive reasons to pay those who happen to make things that are scarce, the beneficiaries from such a system have no strong moral right to their High Seats in the Temple of Our Civilization; that since days long before the evolution of language in the Sociable East-African Plains Ape we have evolved a strong drive to think not just of the one but of the many who are in our group, and to redistribute to the unlucky.

But not so!

Must-Read: Calling Brad Setser! The argument over whether the IMF should “worry about global demand as well as global balance of payments adjustment” was lost back in 1944, when John Maynard Keynes pushed for symmetry and Harry Dexter White nuked it on the grounds that the U.S. would always be a surplus country and so did not want the IMF having levers it could use to push surplus countries around!

Brad Setser: Why Is The IMF Pushing Fiscal Consolidation in the Eurozone in 2017?:

If the IMF wants to be symmetric and worry about global demand as well as global balance of payments adjustment…

…the IMF needs to be as aggressive in recommending fiscal expansion in surplus countries as it is in recommending fiscal consolidation in deficit countries. Judging by its recommendations in Europe, it still has a way to go…. I also will be watching the IMF’s 2017 fiscal recommendation for Korea—which has a German-sized current account surplus and, broadly speaking, a German fiscal policy…. There is of course a second, more straight forward argument for why the IMF might want to encourage Germany to do a bit more public investment in 2017…. There is ample reason for the IMF to encourage Germany to offset the impact of the drag expected from Brexit… even if that means Germany would need to run small structural fiscal deficits for a time. It would support German growth in the face of an expected external shock… ease the pressure on monetary policy when the ECB is at the zero bound… make it easier for Italy, Spain, and France to offset the demand drag from fiscal consolidation through exports… facilitate the eurozone’s internal rebalancing… help reduce the eurozone’s contribution to global current account imbalances…