Must-Read: Thomas Piketty: A New Deal for Europe: “Only a genuine social and democratic refounding of the eurozone…

…designed to encourage growth and employment, arrayed around a small core of countries willing to lead by example and develop their own new political institutions, will be sufficient to counter the hateful nationalistic impulses that now threaten all Europe. Last summer, in the aftermath of the Greek fiasco, French President François Hollande had begun to revive on his own initiative the idea of a new parliament for the eurozone. Now France must present a specific proposal for such a parliament to its leading partners and reach a compromise. Otherwise the agenda is going to be monopolized by the countries that have opted for national isolationism—the United Kingdom and Poland among them…

Must-Read: David Glasner (2015): Neo-Fisherism and All That: “John Cochrane and Stephen Williamson [believe]… if the central bank wants 2% inflation… [and] if the Fisherian real rate is 2%…

…the central bank should set its interest-rate instrument (Fed Funds rate) at 4%, because, in equilibrium–and, under rational expectations, that is the only policy-relevant solution of the model–inflation expectations must satisfy the Fisher equation. The Neo-Fisherians believe… they have overturned at least two centuries of standard monetary theory… back… to Henry Thornton…. The way to reduce inflation is for the monetary authority to reduce the setting on its interest-rate instrument and the way to counter deflation is to raise the setting on the instrument…. Unwilling to junk more than 200 years of received doctrine on the basis, not of a behavioral relationship, but a reduced-form equilibrium condition containing no information about the direction of causality, few monetary economists and no policy makers have become devotees of the Neo-Fisherian Revolution….

Let Cochrane read Nick Rowe…. If he did, he might realize that if you do no more than compare alternative steady-state equilibria, ignoring the path leading from one equilibrium to the other, you miss just about everything that makes macroeconomics worth studying…. The very notion that you don’t have to worry about the path by which you get from one equilibrium to another is so bizarre that it would be merely laughable if it were not so dangerous…

Must-Read: The list of features of the current macroeconomic situation that the Federal Reserve’s communications strategy suggests that it does not grasp keeps growing. In the past we had:

• The asymmetry of the loss function for undershooting vis-a-vis overshooting nominal GDP growth.
• The weakness of monetary policy tools as stimulus in and near the liquidity trap vis-a-vis the strength of monetary policy tools to cool off the economy always.
• The extraordinarily low precision of estimates of the Phillips Curve.

And now we have also:

• The degree to which the slope of the Phillips Curve now is smaller than it was in the 1970s.
• The degree to which the gearing between increases in inflation now and increases in future expected inflation has decreased since the 1970s.
• The fact that lack of strong association between financial jitters and subsequent reduced growth is a reduced form that factors in a stimulative monetary response in response to such jitters.
• The strong links between credit-channel disruptions and reduced spending growth.

And, above all, the fact that in the Greenspan and Volcker eras a lack of concern for downside risks was excusable because demand could always be swiftly and substantially boosted in an afternoon via large interest-rate reductions. Not so in the Bernanke-Yellen era.

It thus seems more and more to me as though the Federal Reserve is making macroeconomic policy in a world that simply does not exist. Tim Duy has comments:

Tim Duy: Lacker, Kaplan, Fischer: “Today Richmond Federal Reserve President Jeffrey Lacker argued that the case for rate hikes remains intact…

…On the opposite side of the table sits Dallas Federal Reserve President Robert Kaplan… very dovish…. Pure wait-and-see, risk management mode…. Federal Reserve Vice Chair Stanley Fischer remains less-moved by recent developments. Instead, low unemployment rates capture his attention…. Fischer sounds very uncomfortable with the prospect of the unemployment rate falling much below 4.7%. He is getting an itchy trigger finger.

I remain unmoved by this logic….

We have seen similar periods of volatility in recent years–including in the second half of 2011–that have left little visible imprint on the economy…. As Chair Yellen said in her testimony to the Congress two weeks ago, while ‘global financial developments could produce a slowing in the economy, I think we want to be careful not to jump to a premature conclusion about what is in store for the U.S. economy.’

This echoes the comments of… John Williams, and again misses the Fed’s response to financial turmoil. In 2011, it was Operation Twist…. I really do not understand how Fed officials can continue to dismiss market turmoil using comparisons to past episodes when those episodes triggered a monetary policy response. They don’t quite seem to understand the endogeneity in the system.

My sense is that there remains a nontrivial contingent within the Fed that really, truly believes they need to hike sooner than later for fear that overshooting the employment mandate will result in overshooting the inflation target. This contingent is attempting to look at the financial system as separate from the ‘real’ economy. That will not work. No matter how good the underlying fundamentals, if you let the financial system implode, it will take the economy down with it. I don’t know that the Fed needs to cut rates, or that they needed to cut rates as deeply as they did during the Asian Financial crisis, but I do know this: The monetary authority should not tighten into financial turmoil. Wait until you are out of the woods. That’s Central Banking 101…

H.G. Wells (1908): Becoming a Socialist: from “New Worlds for Old” (London: Macmillan), pp. 16-19: “A walk I had a little while ago with a friend along the Thames Embankment…

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…from Blackfriars Bridge to Westminster. We had dined together and we went there because we thought that with a fitful moon and clouds adrift, on a night when the air was a crystal air that gladdened and brightened, that crescent of great buildings and steely, soft-hurrying water must needs be altogether beautiful.

And indeed it was beautiful: the mysteries and mounting masses of the buildings to the right of us, the blurs of this coloured light or that, blue-white, green-white, amber or warmer orange, the rich black archings of Waterloo Bridge, the rippled lights upon the silent flowing river, the lattice of girders, and the shifting trains of Charing Cross Bridge–their funnels pouring a sort of hot-edged moonlight by way of smoke–and then the sweeping line of lamps, the accelerated run and diminuendo of the Embankment lamps as one came into sight of Westminster.

The big hotels were very fine, huge swelling shapes of dun dark-gray and brown, huge shapes seamed and bursting and fenestrated with illumination, tattered at a thousand windows with light and the indistinct glowing suggestions of feasting and pleasure. And dim and faint above it all and very remote was the moon’s dead wan face veiled and then displayed.

But we were dashed by an unanticipated refrain to this succession of magnificent things, and we did not cry, as we had meant to cry:

How good it was to be alive!

Along the embankment, you see, there are iron seats at regular intervals, seats you cannot lie upon because iron arm-rests prevent that, and each seat, one saw by the lamplight, was filled with crouching and drooping figures. Not a vacant place remained, not one vacant place.

These were the homeless, and they had come to sleep here. Now one noted a poor old woman with a shameful battered straw hat awry over her drowsing face, now a young clerk staring before him at despair; now a filthy tramp, and now a bearded, frock-coated, collarless respectability; I remember particularly one ghastly long white neck and white face that lopped backward, choked in some nightmare, awakened, clutched with a bony hand at the bony throat, and sat up and stared angrily as we passed. The wind had a keen edge that night, even for us who had dined and were well-clad. One crumpled figure coughed and went on coughing–damnably.

‘It’s fine,’ said I, trying to keep hold of the effects to which this line of poor wretches was but the selvage; ‘it’s fine! But I can’t stand this.’

‘It changes all that we expected,’ admitted my friend, after a silence.

‘Must we go on–past them all?’

‘Yes. I think we ought to do that. It’s a lesson perhaps–for trying to get too much beauty out of life as it is, and forgetting. Don’t shirk it!’

‘Great God!’ cried I. ‘But must life always be like this? I could die, indeed, I would willingly jump into this cold and muddy river now, if by so doing I could stick a stiff dead hand through all these things in the future,–a dead commanding hand insisting with a silent irresistible gesture that this waste and failure of life should cease, and cease forever.’

‘But it does cease! Each year in its proportions it is a little less.’

I walked in silence, and my companion talked by my side.

‘We go on. Here is a good thing done, and there is a good thing done. The Good Will in man–‘

‘Not fast enough. It goes so slowly–and in a little while we too must die.’

‘It can be done,’ said my companion.

‘It could be avoided,’ say I.

‘It shall be in the days to come. There is food enough for all, shelter for all, wealth enough for all. Men need only know it and will it. And yet we have this!’

‘And so much like this!’ said I.

So we talked and were tormented.

And I remember how later we found ourselves on Westminster Bridge, looking back upon the long sweep of wrinkled black water that reflected lights and palaces and the flitting glow of steamboats, and by that time we had talked ourselves past our despair. We perceived that what w

It is very nice to get a favorable view that indicates that the book we wrote is–at least in some respects–the book we thought we had written and tried to write. So Steve and I find ourselves especially grateful this weekend to the very-sharp Ed Luce:

Ed Luce: Is robust American Growth a Thing of the Past?: “My hunch is that [Robert] Gordon is a little too adamant…

…Perhaps we will come up with a cure to Alzheimer’s disease… androids will take… all the low-paying jobs. But even if he is right, there are things we can do…. The embittered US presidential primary battle offers a case study of what happens to politics when people’s economic hopes are dashed…. For an antidote to Gordon’s fatalism, turn to Concrete Economics.

This short book, by the economists Stephen Cohen and Bradford DeLong, is light on data and high on readability. What it shares with Gordon is the view that today’s economy is not serving most Americans well. Growth has slowed and inequality has risen.

Unlike Gordon, however, Cohen and DeLong believe that Americans have the power to do something about it. The key lies in better understanding their history.

If you ask Americans to identify the elixir of their country’s success, most would say something about freedom and entrepreneurship. Government would not feature. Their answer, in other words, would be ideological. A more accurate response, in the authors’ view, would be to draw on America’s creed of pragmatism. Franklin Roosevelt called it ‘bold, persistent experimentation’. Alexander Hamilton — perhaps the most modern of the founding fathers, and the only one who has a rap musical about him running on Broadway — developed the ‘American system’. Cohen and DeLong make a plea for Americans to abandon the ‘ideological incantations and abstract obfuscations’ that have held since the late 1970s in favour of ‘whatever works’ economics.

They make a persuasive case. From Hamilton’s infant industries to Abraham Lincoln’s Homestead Act, the federal government played a guiding role in the American success:

The invisible hand was repeatedly lifted at the elbow by the government and replaced in a new position where it could go on to perform its magic,

they write. If Lincoln had auctioned off land in the west to the highest bidders rather than parceled it out to families, the US would have developed along Latin American-style lines. Government was behind many of the technological leaps that Gordon writes about. Even in the ideological era, government has prodded the market to go where it decrees. But it has taken wrong turns. Huge chunks of the US economy are devoted to financial trading, healthcare claims processing, real estate transaction and other ‘busy but useless’ activity.

It is within America’s scope to reclaim its pragmatism, say the authors. Theirs is a lyrical manifesto. It is a million miles from Gordon’s techno-determinism and a different universe to Trump’s vision. It is also a corrective. Read Gordon and weep. Then perk yourself up with Concrete Economics. Some things are beyond our power to foresee. Others are within the realm of the possible.

Figure 5% of GDP wasted in excess health-care administration, 5% wasted in excess earnings paid to finance, another 15% wasted–from the perspective of America’s societal well-being–in incentivizing the rich and the super-rich in ways that are either ineffective or counterproductive, and another 5% subtracted from GDP by an ideological refusal to do win-win policies (cough infrastructure; cough aggregate demand; plus others) easily within our graph–and we have an America that could be 30% richer, not in the sense that measured real GDP would by 30% higher but in the sense that we would be delivering 30% more useful goods and services to those for whom it really counts. That would hold off Gordon’s stagnation for nearly a generation. And we could do that. Relatively easily. With our ideological blinders off. And with our political will on.