Must-read: Simon Wren-Lewis: “Can Central Banks Make Three Major Mistakes in a Row and Stay Independent?”

Posted on by Brad DeLong

Must-Read: Simon Wren-Lewis: Can Central Banks Make Three Major Mistakes in a Row and Stay Independent?: “Mistake 1: If you are going to blame anyone for not seeing the financial crisis coming…

…it would have to be central banks. They had the data that showed a massive increase in financial sector leverage. That should have rung alarm bells, but instead it produced at most muted notes of concern about attitudes to risk. It may have been an honest mistake, but a mistake it clearly was.

Mistake 2: Of course the main culprit for the slow recovery from the Great Recession was austerity, by which I mean premature fiscal consolidation. But the slow recovery also reflects a failure of monetary policy…. Monetary policy makers should have said very clearly… that fiscal stimulus would have helped them do that job….

What could be mistake 3: The third big mistake may be being made right now in the UK and US… supply side pessimism. Central bankers want to ‘normalise’ their situation… writing off the capacity that appears to have been lost as a result of the Great Recession…. In both cases the central bank is treating potential output as something that is independent of its own decisions and the level of actual output. In other words it is simply a coincidence that productivity growth slowed down significantly around the same time as the Great Recession. Or if it is not a coincidence, it represents an inevitable and permanent cost of a financial crisis. Perhaps that is correct, but there has to be a fair chance that it is not…. What central banks should be doing in these circumstances is allowing their economies to run hot for a time….

If we subsequently find out that their supply side pessimism was incorrect (perhaps because inflation continues to spend more time below than above target, or more optimistically growth in some countries exceed current estimates of supply without generating ever rising inflation), this could spell the end of central bank independence. Three counts and you are definitely out?

Must-reads: April 11, 2016

Posted on by Brad DeLong

Should-Reads:

Yes, in some (many) ways, our macro debate has lost intellectual ground since the 1930s. Why do you ask?

Posted on by Brad DeLong

Last September, the illustrious Simon Wren-Lewis wrote a nice piece about the Bank of England’s thinking about Quantitative Easing: Haldane on Alternatives to QE, and What He Missed Out.

Simon’s bottom line was that Haldane was not just thinking inside the box, but restricting his thinking to a very small corner of the box:

[neither] discussion of the possibility that targeting something other than inflation might help… [nor] any discussion of helicopter money…

And this disturbs him because:

We rule out helicopter money because its undemocratic, but we rule out a discussion of helicopter money because ordinary people might like the idea…. Governments around the world have gone for fiscal contraction because of worries about the immediate prospects for debt. It is not as if the possibility of helicopter money restricts the abilities of governments in any way…. [While] it is good that some people at the Bank are thinking about alternatives to QE, which is a lousy instrument…. It is a shame that the Bank is not even acknowledging that there is a straightforward and cost-free solution…

It disturbs me too.

One reason it disturbs me is that a version of “helicopter money” was one of the policy options that Milton Friedman and Jacob Viner endorsed as the right policies to deal with the last time we were at the zero lower bound, stock Great Depression. Back in 2009 I quoted Milton Friedman (1972), “Comments on the Critics of ‘Milton Friedman’s Monetary Framework'”, quoting Jacob Viner (1933):

The simplest and least objectionable procedure would be for the federal government to increase its expenditures or to decrease its taxes, and to finance the resultant excess of expenditures over tax revenues either by the issue of legal tender greenbacks or by borrowing from the banks..

And Friedman continued:

[Abba] Lerner was trained at the London School of Economics [stock 1930s], where the dominant view was that the depression was an inevitable result of the prior [speculative] boom, that it was deepened by the attempts to prevent prices and wages from falling and firms from going bankrupt, that the monetary authorities had brought on the depression by inflationary policies before the crash and had prolonged it by “easy money” policies thereafter; that the only sound policy was to let the depression run its course, bring down money costs, and eliminate weak and unsound firms…. It was [this] London School (really Austrian) view that I referred to in my “Restatement” when I spoke of “the atrophied and rigid caricature [of the quantity theory] that is so frequently described by the proponents of the new income-expenditure approach and with some justice, to judge by much of the literature on policy that was spawned by the quantity theorists” (Friedman 1969, p. 51).

The intellectual climate at Chicago had been wholly different. My teachers… blamed the monetary and fiscal authorities for permitting banks to fail and the quantity of deposits to decline. Far from preaching the need to let deflation and bankruptcy run their course, they issued repeated pronunciamentos calling for governmental action to stem the deflation-as J. Rennie Davis put it:

Frank H. Knight, Henry Simons, Jacob Viner, and their Chicago colleagues argued throughout the early 1930’s for the use of large and continuous deficit budgets to combat the mass unemployment and deflation of the times (Davis 1968, p. 476)… that the Federal Reserve banks systematically pursue open-market operations with the double aim of facilitating necessary government financing and increasing the liquidity of the banking structure (Wright 1932, p. 162)….

Keynes had nothing to offer those of us who had sat at the feet of Simons, Mints, Knight, and Viner. It was this view of the quantity theory that I referred to in my “Restatement” as “a more subtle and relevant version, one in which the quantity theory was connected and integrated with general price theory and became a flexible and sensitive tool for interpreting movements in aggregate economic activity and for developing relevant policy prescriptions” (Friedman 1969, p. 52). I do not claim that this more hopeful and “relevant” view was restricted to Chicago. The manifesto from which I have quoted the recommendation for open-market operations was issued at the Harris Foundation lectures held at the University of Chicago in January 1932 and was signed by twelve University of Chicago economists. But there were twelve other signers (including Irving Fisher of Yale, Alvin Hansen of Minnesota, and John H. Williams of Harvard) from nine other institutions’…

“Helicopter money”–increases in the money stock used not to buy back securities but instead to purchase assets that are very bad substitutes for cash like the consumption expenditures of households, roads and bridges, the human capital of 12-year-olds, and biomedical research–could be mentioned as a matter of course as a desirable policy for dealing with an economy at the zero lower bound by Jacob Viner in 1933. But, apparently, central banks do not even want to whisper about the possibility. One interpretation is that, confronted with Treasury departments backed by politicians and elected by voters that have a ferocious and senseless jones for austerity even though g > r, central banks fear that any additional public recognition by them that fiscal and monetary policy blur into each other may attract the Eye of Austerity and so limit their independence and freedom of action.

If I were on the Federal Reserve Board of Governors or in the Court of the Bank of England right now, I would be taking every step to draw the line between fiscal policy and monetary policy sharply, but I would draw it in the obvious place:

  • Contractionary fiscal policies seek to lower the government debt (but with g > r or even g near r and hysteresis actually raise the debt-to-GDP ratio and possibly the debt).
  • Expansionary fiscal policies seek to raise the government debt (but with g > r or even g near r and hysteresis actually lower the debt-to-GDP ratio and possibly the debt).
  • Policies that neither raise or lower the debt ain’t fiscal policy, they are monetary policy.
  • Contractionary monetary policies reduce the money stock (and usually but do not have to raise the stock of government debt held by the private sector).
  • Expansionary monetary policies raise the money stock (and usually but do not have to lower the stock of government debt held by the private sector).

And if helicopter money leads Treasuries to protest that the money stock is growing too rapidly? (They cannot, after all, complain that the government debt stock is growing too rapidly because it isn’t.) The response is: Who died and put you in charge of monetary inflation-control policy? That’s not your business.

Must-read: Charles Moore: “The Middle-Class Squeeze”

Posted on by Brad DeLong

Must-Read: Miles Kimball sends us to a convinced British Tory:

Charles Moore: The Middle-Class Squeeze: “If Western countries want to disprove the dire forecasts of Karl Marx…

…we must think creatively about how to make the middle class more prosperous and secure…. Gorbachev accused Mrs. Thatcher of leading the party of the ‘haves’ and of fooling the people about who really controlled the levers of power. The Iron Lady had an answer: ‘I explained,’ she wrote in her memoirs, ‘that what I was trying to do was create a society of ‘haves,’ not a class of them.’ In the era of Ronald Reagan and Margaret Thatcher, those words carried conviction. There was plenty of argument, of course, about whether the means they chose were the best and about the fate of those who got left behind…. In 2015, it is difficult to imagine a version of that Thatcher/Gorbachev conversation being replicated between any Western leader and the hostile and suspicious Vladimir Putin. Neither side seems to have an intelligible ideology. Besides, the confidence is not there anymore. We have become a society of ’have lesses,’ if not yet of ‘have nots.’… In Britain and the U.S., we are learning all over again that it is not the natural condition of the human race for children to be better off than their parents. Such a regression, in societies that assume constant progress, is striking….

When things go backward in nations accustomed to middle-class stability, people start to ask questions. What is the use of capitalism if its rewards go to the few and its risks are dumped on the many? The rights of property do not seem so enticing if the value of what you own collapses or if that property is trapped by debt. What is so great about globalization if it means that the products and services you offer are undercut by foreign competition and that millions of new people can come to your country, take your jobs and enjoy your welfare benefits?… Extremes of both left and right are doing well….

Where might one find a useful analysis of what is happening today in the market democracies of the West? How about this: ‘The executive of the modern State is but a committee for managing the common affairs of the bourgeoisie.’ Or this: ‘Modern bourgeois society… is like the sorcerer, who is no longer able to control the power of the nether world which he has called up by his spells.’ Or this: ‘The productive forces no longer tend to further the development of the conditions of bourgeois property: on the contrary, they have become too powerful for these conditions…[and] they bring disorder into the whole of bourgeois society, endanger the existence of bourgeois property.’… In the 21st century… it is not surprising that many members of the middle class now see themselves as prisoners of the system that they helped to create. Phrases like ‘negative equity’ and ‘credit crunch’ capture that. A lot of words that have a specific economic or financial meaning also draw on a moral meaning—value, bonds, goods, security, even ‘collateralized debt obligations.’ The word ‘credit’ itself means ‘trust’ or ‘belief.’… There is clearly an unmet need for a politics that goes beyond mere grievance-peddling to develop a new way of thinking about what makes a society free and secure at the same time. If this were easy, we would have heard more of it by now….

I am no alarmist, and no one should worry that I have become a late convert to Marxism. Marx’s prescriptions were mostly wrong, and his spirit was intolerant and coercive. He did not understand markets or respect political institutions, and he thought liberty was a sham. But Marx did have an insight about the disproportionate power of the ownership of capital. The owner of capital decides where money goes, whereas the people who sell only their labor lack that power. This makes it hard for society to be shaped in their interests. In recent years, that disproportion has reached destructive levels, so if we don’t want to be a Marxist society, we need to put it right.

Investing in social infrastructure as an anti-recession tool

Posted on by David Hudson
Home health aide Maria Fernandez, left, pours cereal for Herminia Vega, 83, right, as she performs household chores for Vega and her husband.

A new report by the UK Women’s Budget Group offers important advice for what we should do here in the United States when the next recession hits. While spending more on physical infrastructure projects such as bridges and highways is the traditional way to help revive a faltering economy, the Women’s Budget Group argues that government investment in “social infrastructure,” including education, health, and care work, will produce more bang for the buck.

The report begins with a straightforward presentation of the case for fiscal stimulus. When the economy is in recession and unemployment is high, the government can make up for the shortfall in demand in the private sector by increasing government spending. Hiring labor and purchasing inputs to carry out designated projects, frequently related to physical infrastructure, provides a direct boost to demand in the economy. Once the incomes of those working on the new projects or selling inputs to them rise, the multiplier effect of additional consumption kicks in, as those first-round beneficiaries go out and spend more themselves. This is how a well-timed increase in government spending can jump-start the economy.

The main value of the report is its analysis comparing a traditional stimulus plan focused on physical infrastructure with one focused instead on care work, including care for the elderly, the disabled, and preschool-aged children. Concretely, the report estimates the impact that a large government spending program focused on either physical or social infrastructure would have on employment and GDP. While the report was written in the United Kingdom, the Women’s Budget Group conducted the analysis separately for seven countries, including the United States.

To check the robustness of their findings, the researchers conducted two separate modeling exercises. One is based on input-output tables produced by national statistical agencies, which look at the kinds of inputs different industries (construction versus education, for example) use to produce the goods and services they sell. The other is based on a large-scale, private-sector macroeconomic model developed by Cambridge Alphametrics.

Under both modeling approaches, a large-scale investment program focused on social infrastructure yielded substantially more employment than one limited to physical infrastructure.

Using the Women Budget Group’s estimates of the direct effects based on national input-output tables for the United States, government investment in social infrastructure equivalent to 2 percent of GDP would raise employment rates by about 3.4 percentage points, compared to only 1.2 percentage points for a similar investment in physical infrastructure. Counting indirect effects—which include goods and services used in construction or providing care work—the employment impact increases and care work retains roughly a 2-to-1 advantage (a 4.0 percentage-point rise with care work compared to a 1.9 percentage-point rise for a construction-based stimulus). The Cambridge Alphametrics model independently suggests that the relative advantage of social infrastructure investments also holds in the medium and longer term.

The economic logic behind these findings is simple: Social infrastructure is much more labor intensive than physical infrastructure. A given investment in social infrastructure will create more jobs, in care work and elsewhere in the economy, than a similarly sized investment in physical infrastructure will create in construction and other sectors. (This does not mean that investment in physical infrastructure won’t create jobs—the analysis shows large job gains there, too.) And as the Women’s Budget Group also points out, care jobs are much more likely than construction jobs to employ women.

The lessons here go beyond responding to the next recession. If Larry Summers is correct that we may be in a period of “secular stagnation” with chronic deficiencies in demand, a large-scale investment in care work could give the U.S. economy the boost it needs to get to—and remain at—full employment.

Must-read: David Dayen: “The Most Important 2016 Issue You Don’t Know About”

Posted on by Brad DeLong

Must-Read: David Dayen: The Most Important 2016 Issue You Don’t Know About: “We’ve seen plenty of economic issues discussed…

…in this presidential election…. But… practically every major American industry has become extremely concentrated, and this creeping monopolization has increased inequality, created economic hazards where they previously didn’t exist, and heightened public anxiety…. A remarkable hearing in Washington yesterday actually addressed this. And senators from both parties agreed with unusual bluntness and unanimity: Far more needs to be done to fight monopolies and keep them from hurting our economy and our people. Here’s why this hearing was important: We’ve had antitrust laws on the books for over a century to fight industry consolidation. But weak enforcement and an ideological disposition to trust the market to self-correct has diminished antitrust to almost nothing. The fact that both parties want the government to stop monopolies could finally force the agencies to get aggressive and protect the economy.

At a Senate Judiciary subcommittee hearing on antitrust oversight, the first such hearing in three years, everyone—Democrats, Republicans, and the two witnesses, Federal Trade Commission (FTC) chair Edith Ramirez and assistant attorney general of the antitrust division William Baer—agreed that there had been a ‘tsunami’ of mergers and acquisitions (M&A) recently…. Senator Mike Lee, the Utah Republican who chairs the subcommittee, worried that the agencies lack the resources to deal with the merger wave. Ranking member Amy Klobuchar, the Minnesota Democrat, questioned the ‘conduct remedies’ agencies use in lieu of blocking mergers…. Perhaps nobody lit into the antitrust agencies more than Connecticut Democrat Richard Blumenthal…. There have been some successful merger challenges in recent years, from Time Warner Cable/Comcast to Sysco/U.S. Foods to AT&T/T-Mobile. But… more often the agencies impose conditions….

When questioned… the antitrust enforcers appeared to pad their stats. Ramirez, the FTC chair, mentioned on numerous occasions a $1.2 billion settlement with Teva Pharmaceuticals, over a ‘pay-for-delay’ deal it reached with generic manufacturers, preventing competition to its sleep-disorder drug Provigil. But Klobuchar pointed out that the total harm to consumers in increased prices has been estimated between $3.5 and $5.6 billion. ‘The defendant got to keep 70 to 80 percent of the profits,’ Klobuchar said. Ramirez only replied that the FTC tries to estimate the appropriate penalty. We need competition because it benefits consumers on price and quality—there’s no incentive for a monopoly to deliver good service if consumers have no options. We need it because consolidation creates a few winners economically amid many losers, and they use that power to influence politics and take even more gains. We need it because any problem with one big bank or one big food distributor magnifies when the company is one of a precious few. Amazingly, Wednesday’s hearing showed that antitrust policy is not a partisan issue…

Must-read: Jim Zarroli: Raj Chetty et al.’s Life Expectancy Study: It’s Not Just What You Make, It’s Where You Live

Posted on by Brad DeLong

Must-Read: Jim Zarroli: Life Expectancy Study: It’s Not Just What You Make, It’s Where You Live: “Poor people who reside in expensive, well-educated cities such as San Francisco…

…tend to live longer than low-income people in less affluent places, according to a study of more than a billion Social Security and tax records…. The poor tend to have shorter lifespans…. But it also says that among low-income people, big disparities exist in life expectancy from place to place, said Raj Chetty, professor of economics at Stanford University. ‘There are some places where the poor are doing quite well, gaining just as much in terms of life span as the rich, but there are other places where they’re actually going in the other direction, where the poor are living shorter lives today than they did in the past,’ Chetty said…. Low-income people in Birmingham, Ala., live about as long as the rich, but in Tampa, Fla., the poor have actually lost ground…. ‘Men in the top 1 percent distribution level live about 15 years longer than men in the bottom 1 percent on the income distribution in the United States…. Men in the bottom 1 percent have life expectancy comparable to the average life expectancy in Pakistan or Sudan.’

Since 2001, life-expectancy has increased by 2.3 years for the wealthiest 5 percent of American men and by nearly 3 percent for similarly-situated women. Meanwhile, life expectancy has increased barely at all for the poorest 5 percent…. What accounts for the disparity isn’t clear, Chetty says. It may be that some cities such as San Francisco may be better at promoting healthier lifestyles, with smoking bans, for example, or perhaps people tend to adopt healthier habits if they live in a place where everyone else is doing it, he says. The study suggests that the relationship between life expectancy and income is not iron-clad, and changes at the local level can make a big difference. ‘What our study shows is that thinking about these issues of inequality and health and life expectancy at a local level is very fruitful, and thinking about policies that change health behaviors at a local level is likely to be important,’ he says…

Raj Chetty et al.: The Association Between Income and Life Expectancy in the United States, 2001-2014

Must-read: Noah Smith: “101ism in Action: Minimum Wage Edition”

Posted on by Brad DeLong

Must-Read: Noah Smith waxes wroth about really lousy economics perpetrated by Alex Tabarrok, Mark Perry of the invariably-execrable American Enterprise Institute (sorry Norm Ornstein: you inhabit a really bad neighborhood), and a guy who puts things on the internet while remaining anonymous. It need not to be said that randomly tweeting art put on the internet by guys who do not have real names rarely ends well…

But it does need to be said that, for Noah, “Econ 101ism” involves pretending that Econ 101 says things that it does not–that it involves getting the elementary economics 180 degrees wrong, all the while claiming that you are merely parroting elementary economics.

I suggest renaming it: “False-Flag Econ 101ism”. But Noah is right on the big point. This one is a beauty, for Econ 101–the real Econ 101–tells us that the first-order effect of a minimum wage is to transfer wealth from consumers and business owners to low-wage workers…

Noah Smith: 101ism in Action: Minimum Wage Edition: “American Enterprise Institute scholar Mark J. Perry tweeted the following…

Noahpinion 101ism in action minimum wage edition

…I was annoyed by the word ‘actually’…. So I started giving Mark a hard time about ignoring the empirical evidence on the minimum wage question. That’s when Alex Tabarrok jumped in and defended the cartoon, saying that it’s just a basic supply-and-demand model…. But that’s not right…. While the cartoon and the D-S model both predict that minimum wage causes job loss, it’s only a coincidence–they’re not the same model at all… some sloppy political crap made by a cartoonist who doesn’t remember his intro econ class very well…

Must-read: Matthew Klein: “Private Equity’s Mark-to-Make-Believe Problem”

Posted on by Brad DeLong

Must-Read: Matthew Klein: Private Equity’s Mark-to-Make-Believe Problem: “No asset is inherently worth anything…

…just some multiple of the income you think it will produce over time. Both the earnings forecast and the multiple can change at a moment’s notice–sometimes because the outlook for the future has genuinely changed, but often for other reasons…. One sensible response is nihilism: the great appeal of buy-and-hold passive investing is you don’t need to have any opinions…. Others… still try to earn a living betting some of today’s market prices will change, often but not always because they think the average opinion is improperly interpreting the available information. Then there are those, such as private equity firms, who invest in illiquid assets. ‘Illiquid’ in this case means ‘thing that’s almost never traded’, which in practice means ‘we won’t pretend to know what it’s ‘worth’ in the absence of a market, but here’s a number if it makes you feel better’. (This is distinct from the other meaning of ‘illiquid’… which is ‘oh of course we’re good for the money, we just don’t have it on us right now’, usually in response to questions such as ‘I’m not getting back what I lent you because you blew it retaining junior tranches in subprime mortgage bonds, am I?’)…