Must-read: Paul Krugman: “Living with Monetary Impotence”

Posted on by Brad DeLong

Must-Read: [And no sooner do I write:]

There are three possible positions for us to take now:

  1. In a liquidity trap, monetary policy is not or will rarely be sufficient to have any substantial effect—active fiscal expansionary support on a large scale is essential for good macroeconomic policy.
  2. In a liquidity trap, monetary policy can have substantial effects, but only if the central bank and government are willing to talk the talk by aggressive and consistent promises of inflation—backed up, if necessary, by régime change.
  3. We are barking up the wrong tree: there is something we have missed, and the models that we think are good first-order approximations to reality are not, in fact, so.

I still favor a mixture of (2) and (1), with (2) still having the heavier weight in it. Larry Summers is, I think, all the way at (1) now…

But Paul Krugman goes full (1) as well:

Paul Krugman: Living with Monetary Impotence: “Check our low, low rates…

… Fiscal policy has been effective but procyclical…. Monetary policy has been countercyclical but ineffective…. Lender of last resort matters…. Otherwise, not so much…. Open market vs. open mouth operations…. String theory is hard to explain…. Surprise implication: stagnation is contagious.

Quantitative easing: Walking the walk without talking the talk?

Posted on by Brad DeLong

The extremely sharp Joe Gagnon is approaching the edge of shrillness: He seeks to praise the Bank of Japan for what it has done, and yet stress and stress again that what it has done is far too little than it should and needs to do:

Joe Gagnon: The Bank of Japan Is Moving Too Slowly in the Right Direction: “Bank of Japan Governor Haruhiko Kuroda’s bold program…

…has made enormous progress, but it has fallen well short of its goal of 2 percent inflation within two years. Now is the time for a final big push… The government of Prime Minister Shinzo Abe could help by raising the salaries of public workers and taking other measures to increase wages…. But the BOJ should not make inaction by the government an excuse for its own passivity…. The BOJ needs to make a convincingly bold move now… lowering its deposit rate to -0.75 percent… step up purchases of equities to 50 trillion yen…. The paradox of quantitative easing… is that central banks that were slowest to engage in it at first (the BOJ and the European Central Bank) are being forced to do more of it later…. If the BOJ does not move boldly now, it will have to do even more later.

Those of us who are, like me, broadly in Joe Gagnon’s camp are now having to grapple with an unexpected intellectual shock. When 2010 came around and when the “Recovery Summers” and “V-Shaped Recoveries” that had been confidently predicted by others refused to arrive, we once again reached back to the 1930s. We remembered the reflationary policies of Neville Chamberlain, Franklin Delano Roosevelt, Takahashi Korekiyo, and Hjalmar Horace Greeley Schacht gave us considerable confidence that quantitative easing supported by promises that reflation was the goal of policy would be effective. They had been ineffective in the major catastrophe of the Great Depression. They should, we thought, also be effective in the less-major catastrophe that we started by calling the “Great Recession”, but should now have shifted to calling the “Lesser Depression”, and in all likelihood will soon be calling the “Longer Depression”.

Narayana Kocherlakota’s view, if I grasp it correctly, is that in the United States the Federal Reserve has walked the quantitative-easing walk but not talked the quantitative-easing talk. Increases in interest rates to start the normalization process have always been promised a couple of years in the future. Federal Reserve policymakers have avoided even casual flirtation with the ideas of seeking a reversal of any of the fall of nominal GDP or the price level vis-a-vis its pre-2008 trend. Federal Reserve policymakers have consistently adopted a rhetorical posture that tells observers that an overshoot of inflation above 2%/year on the PCE would be cause for action, while an undershoot is… well, as often as not, cause for wait-and-see because the situation will probably normalize to 2%/year on its own.

By contrast, Neville Chamberlain was very clear that it was the policy of H.M. Government to raise the price level in order to raise the nominal tax take in order to support the burden of amortizing Britain’s WWI debt. Franklin Delano Roosevelt was not at all clear about what he was doing in total, but he was very clear that raising commodity prices so that American producers could earn more money was a key piece of it. Takahashi Korekiyo. And all had supportive rather than austere and oppositional fiscal authorities behind them.

But, we thought, monetary policy has really powerful tools expectations-management and asset-supply management tools at its disposal. They should be able to make not just a difference but a big difference. And yet…

There are three possible positions for us to take now:

  1. In a liquidity trap, monetary policy is not or will rarely be sufficient to have any substantial effect—active fiscal expansionary support on a large scale is essential for good macroeconomic policy.
  2. In a liquidity trap, monetary policy can have substantial effects, but only if the central bank and government are willing to talk the talk by aggressive and consistent promises of inflation—backed up, if necessary, by régime change.
  3. We are barking up the wrong tree: there is something we have missed, and the models that we think are good first-order approximations to reality are not, in fact, so.

I still favor a mixture of (2) and (1), with (2) still having the heavier weight in it. Larry Summers is, I think, all the way at (1) now. But the failure of the Abenomics situation to have developed fully to Japan’s advantage as I had expected makes me wonder: under what circumstances should I being opening my mind to and placing positive probability on (3)?

(AP Photo/Koji Sasahara)

Weekend reading: Mapping Student Debt (pt. 2), debunking the mismeasurement myth, and more

Posted on by David Hudson

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 has published this week and the second is 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

In the latest installment of our interactive Mapping Student Debt project, Marshall Steinbaum and Kavya Vaghul analyze how student loan delinquency affects African American and Latino borrowers. Not only do they find that the geography of delinquency is highly racialized, but they also point out that it’s middle-class minorities that suffer the most.

Want to dig into the link between economic inequality and innovation? If so, you’re in luck: A new report from Elisabeth Jacobs develops a framework connecting the rise in U.S. economic inequality with the nation’s decreasing levels of innovation and economic dynamism.

Millennials don’t like to hold down a job, and love to hop from one job to another—or so the story goes. As Nick Bunker explains, though, research shows that young workers today are actually less likely to jump from job to job than in the past. What’s more, the increase in job switching has actually been strongest for older workers.

U.S. productivity growth has slowed since 2004, and some economists and analysts are wondering if our productivity statistics are accurately capturing the gains from new technology. In short, the rise of “free” services that enhance productivity (like Google, for example) may understate the output growth of the U.S. economy and therefore our productivity growth. But looking at an analysis by economist Chad Syverson of the University of Chicago Booth School of Business, Nick Bunker tells us why the mismeasurement story actually doesn’t add up.

When looking at the relationship between productivity growth and wages, economists often view it in the sense that productivity determines wages. But Nick Bunker highlights a few arguments making the case that boosting wages may also increase the pace of productivity growth.

Links from around the web

Seven years ago this week, Congress passed the American Recovery and Reinvestment Act to help the United States recover from the Great Recession. Jared Bernstein and Ben Spielberg highlight a few lessons we should learn from the Recovery Act in order to help us prepare for the next recession. [wa post]

Last month, the Bank of Japan set its interest rate at negative 0.1 percent—joining the central banks of Denmark, Sweden, and Switzerland, which have also moved their interest rates below zero. Frances Coppola argues, however, that negative interest rates are actually a very bad idea. [coppola comment]

Looking at this year’s U.S. presidential election, Noah Smith notes that the United States is seemingly out of good ideas for spurring economic growth. With that said, Smith highlights the promise of an idea that he tentatively calls “New Industrialism”—an idea to “reform the financial system and government policy to boost business investment.” [bloomberg view]

According to a new study from the Federal Reserve Bank of Philadelphia, there’s an interesting downside to winning the lottery: Your neighbors may end up in financial ruin trying to keep up with you. But as Shane Ferro explains, this study “takes income inequality to its extreme conclusion and asks what happens to people who get left behind.” And as the divide between rich and poor continues to grow in our economy, it’s worth looking at how that affects all of us. [huff po]

With the ongoing downturn in commodity prices, many economists and analysts worry that sovereign wealth funds (government-owned investment funds) will sell off assets and, in turn, destabilize markets. Martin Sandbu argues, however, that in the long run, sovereign wealth funds should actually be “seen as a force for good—and be used as such much more than they have been.” [financial times]

Friday figure

 

Figure from “How the student debt crisis affects African Americans and Latinos” by Marshall Steinbaum and Kavya Vaghul.

Must-reads: February 19, 2016

Posted on by Brad DeLong

Must-read: Joe Gagnon: “The Bank of Japan Is Moving Too Slowly in the Right Direction”

Posted on by Brad DeLong

Must-Read: Joe Gagnon: The Bank of Japan Is Moving Too Slowly in the Right Direction: “Bank of Japan Governor Haruhiko Kuroda’s bold program…

…has made enormous progress, but it has fallen well short of its goal of 2 percent inflation within two years. Now is the time for a final big push…. On January 29, the Bank of Japan (BOJ) announced a complicated program to pay different rates of interest on tranches of deposits that banks hold with the BOJ…. Financial markets quickly reacted positively: Real bond yields fell, the yen fell, and stock prices rose. But much of these gains were erased in subsequent days, probably because markets came to believe the effects of the new policy would be small…. Ten-year inflation compensation is now only 0.5 percent, a clear message that markets expect the BOJ to fail to deliver 2 percent inflation….

A shift from 0.1 to -0.1 percent on a small fraction of BOJ deposits is a tiny move…. The BOJ should move to -0.75 percent on future increases in deposits, while paying 0 percent on the current stock of deposits. The BOJ’s program of asset purchases since 2013 moved the best measure of core inflation (consumer prices excluding energy and fresh food) from nearly -1 percent to more than 1 percent. This is about two-thirds of the way to its goal…. But the BOJ cannot afford to make only tiny adjustments to its policies at this time…. The government of Prime Minister Shinzo Abe could help by raising the salaries of public workers and taking other measures to increase wages recently recommended by Olivier Blanchard and Adam Posen in the Nikkei Asian Review. But the BOJ should not make inaction by the government an excuse for its own passivity…. The BOJ needs to make a convincingly bold move now… lowering its deposit rate to -0.75 percent… step up purchases of equities to 50 trillion yen….

The paradox of quantitative easing in the past seven years is that central banks that were slowest to engage in it at first (the BOJ and the European Central Bank) are being forced to do more of it later than those central banks that embraced it earlier (the Bank of England and the Federal Reserve). If the BOJ does not move boldly now, it will have to do even more later.

Must-read: Rob Johnson: “The China Delusion”

Posted on by Brad DeLong

Must-Read: The extremely sharp Rob Johnson is in the camp of those who think that China’s principal short-run problems of problems of macroeconomic management–that investors are not confident that their investments in China will remain profitable–rather than the more-fundamental problems of political economy: the fear by investors that their investments in China are insecure. There’s a return-problems camp. There’s a risk-problems camp. Rob Johnson is in the first:

Rob Johnson: The China Delusion: “China’s transition from an export-led growth strategy to one propelled by domestic consumption…

…is proceeding far less smoothly than hoped. For some people, visions of the wonders of capitalism with Chinese characteristics remain undiminished…. The optimists’ unreality is rivalled by that of supply-siders, who would apply shock therapy to China’s slumping state sector and immediately integrate the country’s underdeveloped capital markets into today’s turbulent global financial system. That is a profoundly dangerous prescription. The power of the market to transform China will not be unleashed in a stagnant economy, where such measures would aggravate deflationary forces and produce a calamity.

The persistent downward pressure on the renminbi reflects a growing fear that Chinese policymakers have no coherent solution to the dilemmas they face. Floating the renminbi, for example, is a dangerous option. After all, with the Chinese economy undergoing wholesale economic transformation, estimating a long-term equilibrium exchange rate that will anchor speculation is virtually impossible, particularly given persistent doubts about data quality, disclosure, and opaque policymaking processes.

But if the current exchange-rate peg to a basket of currencies fails to anchor the renminbi and prevent sharp depreciation, the deflationary consequences for the world economy will be profound. Moreover, they will feed back on the Chinese export sector, thus dampening the stimulative impact of a weakened currency.

The key to stabilising the exchange rate lies in creating a credible development policy. Only then will the pressure on the renminbi, and on China’s foreign-exchange reserves, subside, because investors will see a clear way forward.

Establishing policy credibility will require diminishing the muddled microeconomic incentives of state control and guarantees. It will also require reinvigorating aggregate demand by targeting fiscal policy to support the emerging economic sectors that will underpin the new growth model…

Must-read: Narayana Kocherlakota: “What We’ve Learned About Unconventional Monetary Policy”

Posted on by Brad DeLong

Must-Read: Narayana Kocherlakota has been on quite a roll recently:

Narayana Kocherlakota: What We’ve Learned About Unconventional Monetary Policy: “Lesson 1: Even over relatively long periods of time…

…unconventional monetary policy tools don’t have extreme downside risks…. Lesson 2: Central banks are able to guide inflation close to its desired level using unconventional tools…. One could certainly ask: why was the FOMC consistently aiming for such a low inflation rate in this time frame, given that they expected such a high unemployment rate? (I have posed that question here.) But let’s leave that question aside. Throughout much of the 2008-10 period, many observers outside of the Fed expressed strong concerns about the risk of unduly high or unduly low inflation. Given that level of background uncertainty, I would say that the FOMC did a very good job at using unconventional tools to achieve what policymakers wanted in terms of inflation outcomes. Lesson 3: Hitting inflation objectives does not translate into hitting growth objectives…

Plus:

Narayana Kocherlakota: Interest Rate Increases Are Hard to Undo?: “Yellen made the following statement…

I do not expect that the FOMC [Federal Open Market Committee] is going to be soon in the situation where it is necessary to cut rates….

I argue that her statement suggests that the FOMC’s policy moves will be inappropriately insensitive to adverse information about the evolution of the economy…. There’s some set of economic conditions for which a range of a quarter to half a percent for the target range for the fed funds rate is appropriate. Under an appropriately data-sensitive approach… the FOMC should slightly lower the fed funds rate target range if it confronts a slightly worse set of economic conditions [than that]…. If a move of zero is highly likely, surely a downward move of a quarter percent point should be more than a little possible? But Chair Yellen’s statement suggests that this isn’t the way that the FOMC is thinking about the situation…. She seems to be saying that it will take a pretty bad turn of events for the FOMC to be willing to reverse its December move.  Such an approach means that the FOMC’s December has created a new higher floor….

The FOMC could be a lot more data-sensitive than I’ve described when it considers interest rate cuts. Failing that, the other response is to realize that any future rate increase will push upwards on the new soft floor.  That realization should make the FOMC very cautious about undertaking any future rate increase.

And:

Narayana Kocherlakota: Negative Rates: A Gigantic Fiscal Policy Failure: “Since October 2015, I’ve argued that the Federal Open Market Committee (FOMC)…

…should reduce the target range for the fed funds rate below zero. Such a move would be appropriate for three reasons:

  • It would facilitate a more rapid return of inflation to target.
  • It would help reduce labor market slack more rapidly.
  • It would slow and hopefully reverse the ongoing and dangerous slide in inflation expectations. 

So, going negative is daring but appropriate monetary policy. But it is a sign of a terrible policy failure by fiscal policymakers.

The reason that the FOMC has to go negative is because the natural real rate of interest r* (defined to be the real interest rate consistent with the FOMC’s mandated inflation and employment goals) is so low.   The low natural real interest rate is a signal that households and businesses around the world desperately want to buy and hold debt issued by the US government. (Yes, there is already a lot of that debt out there – but its high price is a clear signal that still more should be issued.)  The US government should be issuing that debt that the public wants so desperately and using the proceeds to undertake investments of social value.

But maybe there are no such investments?  That’s a tough argument to sustain quantitatively.  The current market real interest rate – which I would argue is actually above the natural real rate r* – is about 1% out to thirty years.  This low natural real rate represents an incredible opportunity for the US. We can afford to do more to ensure that all of our cities have safe water for our children to drink.  We can afford to do more to ensure that our nuclear power plants won’t spring leaks.  We can afford to do more to ensure that our bridges won’t collapse under commuters.

These opportunities barely scratch the surface.  With a 30-year r* below 1%, our government can afford to make progress on a myriad of social problems.  It is choosing not to. 

If the government issued more debt and undertook these opportunities, it would push up r*.  That would make life easier for monetary policymakers, because they could achieve their mandated objectives with higher nominal interest rates. But, more importantly, the change in fiscal policy would make life a lot better for all of us. 

I don’t think that Chair Yellen will say the above in her Humphrey-Hawkins testimony tomorrow – but I also think that it would be great if she did.

Narayana Kocherlakota: Dovish Actions Require Dovish Talk (To Be Effective): “The Federal Open Market Committee (FOMC) has bought a lot of assets and kept interest rates extraordinarily low…

…Yet all of this stimulus has accomplished surprisingly little (for example, inflation and inflation expectations remain below target and are expected to do so for years to come)…. Over the past seven years, the FOMC’s has consistently talked hawkish while acting dovish. This communications approach has weakened the effectiveness of policy choices, probably in a significant way…. In December 2008, the FOMC lowered the fed funds rate target range to 0 to a quarter percent. It did not raise the target range until December 2015, when the unemployment rate had fallen back down to 5%.   But – with the benefit of hindsight – a shocking amount of this eight years’ worth of unprecedented stimulus was wasted, because it was largely unanticipated by financial markets…

Abundance and the direction of technological growth

Posted on by Bridget Ansel
An activist cheers at a minimum wage rally in New York. Given the slow productivity growth, some economists are wondering if higher wages might increase productivity.

Where does productivity growth come from? The definitive answer to that question would quickly win someone a Nobel prize and the immediate gratitude of economists and policymakers. (Well, maybe not the economists researching the causes of productivity growth.) The arrival of that revelation, however, is far from imminent.

But in the here and now, given the slow productivity growth in the United States, there’s been quite a bit of thinking recently about how to push productivity growth up. One provocative idea that has captured some attention is that boosting wages will help increase the pace of productivity growth.

When we think about the relationship between productivity and wages, it’s usually in the sense that productivity determines wages. The arrow of causality points from higher productivity to higher wages. But it’s possible that the arrow can point in the other direction at the same time—higher wages might also increase productivity. That’s some of the thinking behind the efficiency wage argument, reviewed here by Justin Wolfers of the University of Michigan and Jan Zilinsky of the Peterson Institute of International Economics.

Expanding that intuition to the broader economy, Noah Smith wonders if direct policy intervention in the form of higher minimum wages may increase innovation and therefore productivity growth. And in a piece from two years ago, Ryan Avent of The Economist fleshes out a deeper argument: that in incentivizing work from low-wage workers, wages remain low and reduces the incentive to innovate. If these workers were able to live without earning wages from work, wages might rise and spark labor-saving innovation. Jared Bernstein of the Center on Budget and Policy Priorities floats the idea that during periods of full employment, when the labor market and the economy as a whole use labor and capital to their capacity, productivity can be boosted as companies innovate in response to higher wages.

These arguments are similar to the idea of directed technical change, first introduced in a 2001 working paper by economist Daron Acemoglu of the Massachusetts Institute of Technology. The idea is that the relative prices of the factors of production affect the kind of innovation and productivity growth in an economy. So an economy where wages are higher will have productivity growth biased toward using labor less and using capital more. Discussing the possibility of a global labor shortage, Duncan Weldon uses a directed technical change-type argument to point out that a decline in available labor won’t necessarily lead to an increase in labor’s bargaining power.

It’s worth reminding ourselves that our knowledge of how to spur productivity growth is limited, to say the least. But let’s also not limit the potential sources that we look into.

Must-read: David Glasner: “Competitive Devaluation Plus Monetary Expansion Does Create a Free Lunch”

Posted on by Brad DeLong

Must-Read: The very sharp David Glasner says–correctly–that currency war is different from war-war. War war is a negative sum game. Currency war is a positive-sum game:

David Glasner: Competitive Devaluation Plus Monetary Expansion Does Create a Free Lunch: “Hawtrey explained why competitive devaluation in the 1930s was–and in my view still is–not a problem…

…Because the value of gold was not stable after Britain left the gold standard and depreciated its currency, the deflationary effect in other countries was mistakenly attributed to the British depreciation. But Hawtrey points out that this reasoning was backwards. The fall in prices in the rest of the world was caused by deflationary measures that were increasing the demand for gold and causing prices in terms of gold to continue to fall, as they had been since 1929. It was the fall in prices in terms of gold that was causing the pound to depreciate, not the other way around….

Depreciating your currency cushions the fall in nominal income and aggregate demand. If aggregate demand is kept stable, then the increased output, income, and employment associated with a falling exchange rate will spill over into a demand for the exports of other countries and an increase in the home demand for exportable home products. So it’s a win-win situation.

However, the Fed has permitted passive monetary tightening over the last eighteen months, and in December 2015 embarked on active monetary tightening…. Passive tightening has reduced US demand for imports and for US exportable products, so passive tightening has negative indirect effects on aggregate demand in the rest of the world…