The argument that ought to be decisive in convincing the Federal Reserve as currently structured to not tighten but loosen over the next year is that in order to establish credibility that its 2%/year inflation target is an average, and not a ceiling, it needs to overshoot it for a period of time in the near future. The other arguments–that the Federal Reserve should be aiming for 4%/year inflation or 6%/year nominal GDP growth, that it needs to explore the policy space in order to learn more about the current structure of the economy and the location and slope of the Phillips curve (if any), that it needs to act responsibly as the global monetary hegemon rather than irresponsibly as an organization with a narrow focus exclusively on the US internal balance–ought to be decisive too if the Federal Reserve Open Market Committee were properly constituted. But given how the Federal Reserve Open Market Committee is currently constituted, they are not.

But the need to establish credibility that the target is 2%/year rather than ≤2%/year really ought to be decisive.

We have Tim Mullaney and Matt O’Brien making other very cogent arguments. Mullaney says–I believe correctly–that the Fed’s models are predicting a rise in inflation that is more likely than not to once again evaporate:

Tim Mullaney: 4 reasons we know we’re not ready for the Fed to raise rates: “Many investors would like a clearer standard for when the economy is ready for rate hikes…

…Here are four bars it should have to clear. And it hasn’t cleared any yet: [1] 250,000 jobs a month, pretty consistently…. The jobs report misses that test. It’s been generating more like 212,000 this year…. [2] Above-trend economic growth, pretty consistently…. If third-quarter tracking estimates hold up, the first nine months of this year are at about 2.2%…. Central banks should feed economies until they break through the trend, and pull money out as above-trend growth moves us toward inflation…. [3] Real full employment: To hear business-as-usual pundits tell it, we’re at full employment. But we’re not….

[4] Signs of capacity or cost pressures: The reason the Fed raises rates isn’t to reimpose Protestant virtue lost when money is cheap and investment gets as licentious as a cheerleader. It’s to prevent inflation. And while Fed Vice Chair Stanley Fischer argued last week you don’t always see inflation coming before it’s too late, it’s not too late. Begin with the still-slack labor market, and especially the 2.2% increase in average hourly wages over the last year. Then add weak capacity utilization and business investment…. Inflation is several steps away–labor markets must tighten more, wages have to rise, and business has to fail to offset the higher pay by accelerating productivity. There’s a reason the Fed staff’s leaked projections in July saw sub-2% inflation until 2020…

And O’Brien that outside observers have given up saying that the Fed must start to type because inflation is just around the corner, and started saying that the Fed must tighten just because:

Matt O’Brien: “People used to say the Federal Reserve had to raise rates to fight nonexistent inflation…

…Then they said the Federal Reserve had to raise rates to fight nonexistent bubbles. And now they say the Federal Reserve has to raise rates for nonexistent reasons. Just, you know, to show that it can. This is not progress….

The Fed, after all, doesn’t want to wait until the economy is obviously overheating to start raising rates, but rather right before it does so. The only problem with that is there aren’t any signs the economy is anything other than properly heated right now. Workers still aren’t getting bigger raises, just 2 percent a year compared to the 3.5 to 4 percent they normally would, and inflation is still dead at just 0.3 percent. That picture doesn’t change even if you strip out volatile food and energy prices, with so-called core inflation at only 1.2 percent, and not even trending up….

But some people are tired of this debate. The Fed hinted it might raise rates now, and, by golly, that’s what they want it to do, whether or not the data actually support that. ‘What are you worrying about, September or December,’ former Fed governor Laurence Meyer wondered, when ‘it doesn’t matter’ and the Fed should ‘just pull the trigger.’ Economist Tyler Cowen said he ‘would consider a ‘dare’ quarter point increase just to show the world that zero short rates are not considered necessary for prosperity and stability.’ And New York Times columnist William Cohan implored the Fed to ‘show some spine’ and start hiking despite the sell-off.

These are psychological arguments, not economic ones.

As Larry Summers says, if the federal funds rate were 4% right now few would be thinking of raising it. You do have to strongly believe in “normalization”. If you were a Bernanke, and believed that the policy deviations in emerging markets that created the global savings glut are on the way out, there might be a case. Or if you were a Rogoff, and believe that the deleveraging cycle was almost completed, there might be a case. But Carmen Reinhart is saying “wait”. And I really did not think that Janet or Stan thought like Ken or Ben.

Must-Read: Has Simon Wren-Lewis just become a Lernerian–a devotee of and an evangelist for MMT? It looks to me as though that is the case! Mirabile visu:

Simon Wren-Lewis: Spain, and How the Eurozone Has to Get Real About Countercyclical Policy: “The current recovery… is export led, which is exactly what you would expect…

…The Eurozone does have a natural correction mechanism when a country becomes hopelessly uncompetitive as a result of a temporary domestic boom (whatever its cause). The mechanism is a recession and what economists call ‘internal devaluation’: falling wages and prices. The problem with this correction mechanism is that, on its own, it is slow and painful, particularly when Eurozone inflation is so low. So the key question is what could Spain have done to avoid having such a painful period of correction…. As Matthew Klein points out, Spain already had some sensible macroprudential monetary policies, and it seems likely that more of the same would not have been enough. Which brings us of course to fiscal policy…. Many commentators… say, correctly, that Spain’s problem was never a profligate government…. [But for] an individual country in a currency union the deficit is not the appropriate metric to judge short term fiscal policy…. The appropriate metric is national inflation relative to the Eurozone average…. So forget the actual budget deficit or any cyclically corrected version, fiscal policy was just not tight enough.

I have been told so many times that for Spain to have a tighter fiscal policy before the crisis was ‘politically impossible’. If that really is true, then Spain has little to complain about when it comes to the subsequent recession…. It seems more than likely that the existing monetary but not fiscal/political union is here to stay for some time. Many in Europe’s political elite plan to move quickly to greater union (see Andrew Watt here), but there are serious obstacles in their path. The current system can be made to work better, and strong countercyclical fiscal policy is an obvious part of that…. Just how many years and recessions does it take before what is obvious textbook macroeconomics can become politically acceptable?

Must-Read: The standard story of Christensenian disruption is that there is a niche large enough to allow for economies of scale and for learning by doing but too small for incumbents to focus on serving–and then the disruptive technology eats the rest of the industry alive as it rides down the learning curve while incumbents cannot find a way to compete because cannibalizing their existing markets is not something their organizations can actually plan and do. The problem with the TV is that there does not seem to be any such niche as long as cable providers bundle the set-top box. Therefore either the FTC has to intervene and force unbundling, or Apple has to hope there are enough fanboys who will buy anything it makes to get them over the hump. It will be interesting to watch:

Steve Jobs (2010): Apple and the TV Market: “The television industry… has a subsidized… model…

…that gives everybody a set-top box for… $10 a month… [so] nobody is willing to buy a set top box. Ask TiVo, ask ReplayTV, you know. Ask Roku, ask Vudu, ask us, ask Google in a few months…. Sony has tried as well, Panasonic has tried, a lot of people have tried and they’ve all failed…. You can say ‘well, gosh… I’ll just add another little box with another one!’… [and] end up with a table full of remotes, cluster full of boxes, bunch of different UIs…. The only way that’s ever going to change is if you… redesign [the set-top box] from scratch with a consistent UI… and get it to the consumer in a way that they’re willing to pay for it. And right now there is now way to do that…

Must-Read: One of the things that has slipped through the cracks this late summer is my sitting down to read the extremely sharp Dani Rodrik’ Economics Rules. Here are selections from what my Visualization of the Cosmic All suggests is a good review:

N. Emrah Aydınonat: Using and Abusing Models in Economics: A Review of Rodrik’s Economics Rules: “Rodrik… argues that both unrealistic assumptions and mathematics are useful in economic modelling…

…makes the case for economics as a social science… does not have fundamental laws, and economists should not behave as if they have discovered the fundamental laws…. Models clarify hypotheses, enable accumulation of knowledge, imply an empirical method, and help economists generate knowledge based on shared professional standards…. Rodrik… explain[s] the general principles of model selection… verify[ing] (i) critical assumptions… (ii) mechanisms… (iii) direct implications… and (iv) incidental implications…. General economic theories are frameworks for organizing our thoughts, ‘rather than stand-alone explanatory frameworks’… specific to particular cases… a modest science….

Chapter 5: When Economists Go Wrong…. Mistaking a model (more appropriately, economists’ preferred models at the time) for the model is the most important reason why economists go astray. In the case of the financial crisis, the preferred models were models that support the efficient market hypothesis. In the case of Washington Consensus, the preferred models were the models that assume that the main drivers of growth were saving and access to investable funds. So how did economists get it so wrong in both of these cases? Not because they did not have appropriate models (they did), rather they became overconfident concerning some models, and ignored others. They have confused a model, with the model….

Rodrik argues that economics is not the problem, economists are… idealization, abstraction, utilization of unrealistic assumptions, methodological individualism are not problems as long as one appreciates the diversity of economic models and accepts the fact that each economic model is an attempt to understand some real world relationships in isolation. Market favoritism is not a problem of economics… [but] rather a problem created by some overconfident economists…. Economics is more pluralist than it appears…

And here is a quote from John Maynard Keynes’s obituary for Alfred Marshall that strikes me as in the same intellectual space as what my Visualization of the Cosmic All leads me to suspect Dani’s book is:

John Maynard Keynes (1924): Alfred Marshall: “The study of economics does not seem to require…

…any specialised gifts of an unusually high order. Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy and pure science? Yet good, or even competent, economists are the rarest of birds. An easy subject, at which very few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher—in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician…

Must- and Should-Reads:

• Robert Reich: What Happened to the Moral Center of American Capitalism?
• Yael T. Abouhalkah: Woeful new jobs figures should embarrass Govs. Sam Brownback and Jay Nixon
• Yuriy Gorodnichenko: Infrequent but Long-Lived Zero-Bound Episodes and the Optimal Rate of Inflation
• Must-Read: Jared Bernstein: How Welfare Reform Ruined Public Assistance for the Very Poor, According to Kathryn Edin and Luke Shaefer’s New Book, $2.00 a Day
• Jonathan Portes: What’s The Effect Of Immigration On London?
• Must-Read: Paul Krugman: Trump Is Right on Economics
• MaxSpeak: A Postscript on Job Guarantees
• Cathy O’Neil: Big Data, Disparate Impact, and the Neoliberal Mindset

Might Like to Be Aware of:

• Must-Read: Chad Orzel: Planning To Study Science In College? Here’s Some Advice

I am now swinging into the camp of thinking that the only way to understand this–and by “this” I mean everything from Peter Schiff to Robert Lucas–is as a form of affinity fraud:

Must-Watch: Josh Barro Laughs At Peter Schiff Claiming Economy In Recession For Entire Obama Presidency:

I find the very sharp Marty Felstein engaging in a goalpost-moving effort that I cannot endorse:

There may be some powerful argument that the true consumer price index has risen more for the rich than for the middle class and the poor. But if there is, I am not aware off it. And so I think: The existence of downward bias from failure to measure the value of new good and new kinds of goods in official statistics of real income growth does not reduce the rise in inequality over the past generation–although it does mean that we collectively are richer now relative to our predecessors than we would be if official statistics were gospel.

Here I think we need to draw some distinctions. If you are not tech-savvy–if you are not a relatively intensive user of modern information, entertainment, and communication technologies–then you do not benefit from them. Then the official statistics showing declining median incomes over the past generation apply to you. And you are certainly much poorer now than you reasonably expected back then to be now. And it is wholly reasonable for you to believe that, while the economy has worked for the rich, it has not worked for you and somebody should be held accountable.

If you are tech-savvy, then it is still reasonable for you to complain. You do need to praise the bureaucrats of DARPA and the other pieces of government support for what became Silicon Valley. You do need to be grateful for California entrepreneurship and enterprise. But that enormous outpouring of wealth and enterprise is orthogonal to the rest of the economy–which has still failed you. And, especially, it is not irrational for you to feel upset by the fact what you thought were the standard indicia of middle-class status now seem beyond your grasp and getting further beyond every day.

Thus while I very much agree with Marty that we should be doing much more to boost the growth of middle-class incomes in the future, I do think it is very important to look at the reasons why the coming of Silicon Valley was not associated with an increase in the pace of growth of middle-class incomes but, even with Marty’s adjustments of the statistics, a decline.

It is not as though median incomes remained a constant fraction of per capita net economic product, is it? And it is not as though the rise in income inequality brought forth anything of the promised increase in the ex-Silicon Valley rate of economic growth, is it? And it is not as though Silicon Valley was in any sense the product of lower tax rates on the rich, is it?

In my view, not reduced marginal tax rates and their result of still less social insurance is the road to faster growth of median incomes. Rather, it is a government that pragmatically identifies the true industries of the future and makes it easy for the economy to move into them that we should seek.

Martin Feldstein: The U.S. Underestimates Growth: “Statisticians are supposed to measure price inflation and real growth…

…Which means that, with millions of new and rapidly changing products and services, they are supposed to assess… exactly how much it costs now to buy the same quantity of “value” or “satisfaction” that $1,000 could buy a year ago. These tasks are virtually impossible…. It is relatively easy to add up the total dollars that are spent in the economy–the amount labeled nominal GDP…. Comparing the increase of nominal GDP to the increase in the price level… is impossibly difficult… particularly… for new products…. The official method of calculating the price index doesn’t incorporate this new product until total spending on it exceeds some threshold level…. The main effect of raising well-being… [by] introduc[tion] is completely ignored…. The result is that the rise in real incomes is underestimated….

Over the past two decades…. the… [measured] increase of [median] real household income [is] down to less than 5%… [in] official statistics also… a 10% decline… since 2000, fueling economic pessimism. But these low growth estimates fail to reflect the remarkable innovations in everything from health care to Internet services to video entertainment that have made life better…. We should worry less about the appearance of slower growth of middle-class incomes and do more to increase that growth in the future.

Must-Read: Paul Krugman: Trump Is Right on Economics: “The economy has nonetheless done far better than should have been possible…

…if conservative orthodoxy had any truth to it. And now Mr. Trump is being accused of heresy for not accepting that failed orthodoxy?… [Moreover,] Bush’s attacks on Mr. Trump are falling flat, because the Republican base doesn’t actually share the Republican establishment’s economic delusions…. We didn’t really know that until Mr. Trump came along. The influence of big-money donors meant that nobody could make a serious play for the G.O.P. nomination without pledging allegiance to supply-side doctrine, and this allowed the establishment to imagine that ordinary voters shared its antipopulist creed…. Bush’s hapless attempt at a takedown suggests that his political team still doesn’t get it, and thinks that pointing out The Donald’s heresies will be enough to doom his campaign…. Trump, who is self-financing, didn’t need to genuflect to the big money…. It turns out that the base doesn’t mind his heresies….

I’m not making a case for Mr. Trump. There are lots of other politicians out there who also refuse to buy into right-wing economic nonsense, but who do so without proposing to scour the countryside in search of immigrants to deport, or to rip up our international economic agreements and start a trade war. The point, however, is that none of these reasonable politicians is seeking the Republican presidential nomination.

Must-Read: Jared Bernstein: How Welfare Reform Ruined Public Assistance for the Very Poor, According to Kathryn Edin and Luke Shaefer’s New Book, $2.00 a Day: “Over the past few decades, anti-poverty policy in this country…

…has evolved to be ‘pro-work.’… Low-income parent[s] who[‘re] well connected to the job market the government will help…. But if you’re disconnected from the job market public policy won’t help you much…. How do people in that second group survive?… Edin and… Shaefer…. A few… strategies: availing themselves of charities and public spaces (like libraries), selling food stamps for cash (illegal, and they typically get just 60 cents on the dollar on the street), relying on relatives (who can be as hurtful as helpful), selling scrap metal or aluminum cans, selling plasma (which involves considerable angst as to whether a person’s blood’s iron levels are sufficiently high, especially difficult around menstruation), receiving some public support (housing vouchers, nutritional support, disability payments), occasionally holding a job, and—the most common strategy of all—just going without…. $2-a-day poverty doesn’t mean that their subjects really survive for long periods on nothing but $2 a day… no one could survive in this country if that was all they had to live on over an extended period. What they call ‘$2-a-day poverty’ means spells of scraping by on almost no regular, reliable income, though many may be able to access the dicey income sources just noted above…. ‘1.5 million households with roughly 3 million children were surviving on cash incomes of no more than $2 per person, per day in any given month’ in 2011. That’s about 4 percent of all families with kids, though once you start adding other resources, like the value of SNAP (Supplemental Nutrition Assistance Program, more commonly known as food stamps), that percentage declines. Though blacks and Hispanics are disproportionately likely to be deeply poor, half are white…