Must-Read: Axel Weber (2013): Reconstructing Macroeconomics: “In Davos, I was invited to a group of banks…

…Deutsche Bundesbank is frequently mixed up in invitations with Deutsche Bank. I was the only central banker sitting on the panel. It was all banks. It was about securitizations. I asked my people to prepare. I asked the typical macro question: who are the twenty biggest suppliers of securitization products, and who are the twenty biggest buyers. I got a paper, and they were both the same set of institutions…. I said: ‘It looks to me that since the buyers and the sellers are the same institutions, as a system they have not diversified’. That was one of the things that struck me: that the industry was not aware at the time that while its treasury department was reporting that it bought all these products its credit department was reporting that it had sold off all the risk because they had securitized them. What was missing… is that finance and banking was too-much viewed as a microeconomic issue that could be analyzed by writing a lot of books about the details of microeconomic banking…. The whole view of a systemic crisis was just basically locked out of the discussions and textbooks…

Must-Read: Noah Smith makes an extremely cogent case that any increases in interest rates by the Federal Reserve this September for this December or, indeed, next March are almost surely premature and inappropriate. So why is the Federal Reserve on track to do so? I think there are three reasons. First, Fed chair Janet Yellen thinks that a productivity growth slowdown is right now putting upward pressure on the natural rate of unemployment; second, too many of the regional bank presidents on the FOMC listen too much to commercial bankers who believe–wrongly, I think–that their businesses will be healthier in five years if the Fed treats its 2%/year inflation target as a ceiling rather than an average and raises rates whenever it has any excuse to do so; and, third, Fed Chair Janet Yellen may be less willing than she should to split the FOMC consensus and go her way with the support of the president-appointed and senate-confirmed governors, for whom Larry Meyer’s rule is “you vote with the Chair”:

Noah Smith: Three Reasons the Fed Can Wait to Raise Rates: “The U.S. economy is perceived [by the Fed] to be in recovery…

…this seems to be a very odd time to raise rates and there are at least three reasons for this: Inflation is very low… has been consistently below [the 2%] target for more than a year and a half…. China is crashing. Although the Chinese government insists that its economy is still expanding at a nice 7 percent clip, most people believe that growth… is spluttering…. The stock market just crashed, the real estate market is tumbling and government actions… look panicky…. U.S. labor markets have still not recovered fully from the Great Recession…. There have been some encouraging signs recently that these so-called discouraged workers are starting to return to the job market…. So there are big reasons for the Fed to delay increasing rates. Why, then, does it seem to be sticking with the September liftoff schedule?… Today, the U.S. finds itself in a strikingly similar situation to Japan in 2000–interest rates at zero, inflation below target, employment still soft and a major trading partner experiencing a crash. U.S policy makers shouldn’t be so focused on fear of zero interest rates that they end up tanking the economy. The Fed should exercise caution.

Must-Read: It was this very smart person who first clued me in in late 2009 to the fact that ObamaCare was a lobster with two claws–an Exchange claw and a Medicaid expansion claw–and that even though the energy and attention was all on the first, the second claw was likely to be the big claw:

Paul Krugman: The Medicaid Two-Step: “Aside from the facts that Medicaid is real insurance and Medicaid recipients are real people…

…the whole ‘but it’s just a Medicaid expansion’ claim is outrageous coming from people who insisted just the other day that expanding Medicaid wouldn’t work. So will the Medicaid-won’t work claim be dropped? Of course not. No anti-Obamacare argument ever is. These are people completely untroubled by cognitive dissonance.

Must-Read: Robert Skidelsky is depressed because of (i) bad financial regulation before 2007; (ii) too weak a policy response to restore demand during 2007-2009 and after; and (iii) a policy response biased toward inducing investment in long-duration assets, which risks creating more systemic problems down the road:

Julie Verhage: The Two Big Economic Policy Failures That John Maynard Keynes Would Be Disappointed by Today: “Robert Skidelsky… prominent biographer of Keynes, shared his thoughts…

…First, [Keynes] would be frustrated with the lack of  precautions taken to prevent a huge financial crash like the one we saw in 2008. Secondly, Lord Skidelsky believes Keynes wouldn’t be happy with the policy measures taken after the crash. Keynes would have wanted a more ‘buoyant response’….

The recovery has been very very slow. We’ve been for many years in a state of semi-stagnation, and the recovery is still very very weak in the European Union…

[And third:]

The actual recovery measures we’ve taken, particularly quantitative easing, have actually skewed the recovery towards asset buying and real estate, thus threatening to recreate the circumstances that led to crash in the first place. I think he would have been disappointed by those policy failures.

One of the not-irrational fears of blowback from ObamaCare was that the employer mandate to cover full-time workers would lead a lot of employers to cut worker hours back. Instead of full-time jobs at 40 hours/week, a lot of people would wind up with part-time jobs at 25 hours/week and no benefits–plus the 25 hours would shift from week to week, requiring that they be on call for 50 hours a week a so.

This led me to suspect that dropping the employer mandate might be a good idea. The employer mandate was there, after all, (a) to make large employers that could efficiently provide benefits pay a little if they had been gaming the system by using Medicaid as their benefits department, and (b) to diminish immediate churn of insurance upon ObamaCare implementation by making large employers that could efficiently provide benefits pay a little if they had started gaming the system by using the Exchange as their benefits department. Both of these appear, in retrospect, to have been starting at shadows. Hence dropping the employer mandate in order to reduce bureaucracy seems to me to be a good idea.

But the fear that the employer mandate was badly deranging the part-time/full-time labor market margin–a real fear ex ante, and one concerning which the data was fuzzy and slightly worrisome for a while–appears not to be a thing:

Must-Read: CEPR: Beat the Press” The Affordable Care Act and Part-Time Employment: Voluntary vs. Involuntary: “We here are CEPR were glad to see that new research confirms what we had shown earlier…

…the Affordable Care Act (ACA) did not create a ‘part-time’ nation, as many of its opponents [had] warned…. [We] looked at the period when employers would have expected the sanctions to have been in effect, the first six months of 2013… [found] a small increase in the percentage of workers employed between 25 and 29 hours a week, just under the 30 hours a week cutoff… as… opponents… [had] predicted. However this increase was due to a reduction in the percentage of people working less than 25 hours a work….

Because people can now get insurance through the exchanges, many people will opt to work fewer hours at jobs that don’t provide health insurance… many parents with young children and possibly among older pre-Medicare age workers who might find it difficult to work full time…. Our takeaway is that the ACA is not taking away full-time jobs from people who need them, but it is giving many people an option to work part-time that they did not previously have. That looks like a pretty good deal.

Has the CEPR dropped bylines on Beat the Press because it has become a distributed anthology intelligence?

:-)

Must-Read: John van Reenan: Corbyn and the Political Economy of Nostalgia: “There is a deep ambivalence in the party over the New Labour years…

…On the economic side, the 1997-2008 period was one of strong economic performance… rooted in both improved productivity and higher employment rates… reducing the power of monopolies (like the 2002 Enterprise Act), ensuring flexible labour markets (such as Labour’s New Deal for Young Unemployed and Job Centre Plus), boosting years in education, and supporting innovation (e.g. increases in the Science budget)…. Inequality [had] shot up… in the 1980s, yet from the mid-1990s the income differences between the top and bottom 10% narrowed … due to policies such as the introduction of the first national minimum wage in 1999 and generous increases in benefits and tax credits especially for working families. Increased spending on health and schools also disproportionately benefited the least well off. These reductions in the inequality amongst the vast majority if people are overlooked by many in Labour’s left who focus obsessively on the top 1%, whose share of income did indeed rise under Labour….

Without doubt, Labour’s biggest economic policy failing was poor financial regulation… [part of] a worldwide collective failure…. The period since 2008 has been an unhappy time…. The disastrous decision to accelerate austerity in 2010 under the Coalition, especially the 40% cut in public investment, unnecessarily prolonged the pain. Labour was ineffective in attacking the government’s austerity record. The fact that in hindsight slightly larger budget surpluses should have been run during the pre-crisis period has been turned into the mantra of Labour’s “out of control” public spending both causing the crisis and being the reason for accelerated fiscal consolidation…. Part of the problem was that Labour was reluctant to highlight its rather sensible pledge[s]….

Instead of being proud to say that public investment should not be included in plans for eliminating the deficit as capital spending has a longer term return than current spending, it prevaricated out of fear of looking fiscally irresponsible. New Labour’s sheepishness in defending its record had allowed the Corbynistas to make all the running…. Voting for Corbyn is gesture politics. It makes many on the left feel good about themselves and avoids the painful task of re-thinking policies and reconnecting beyond the base to the rest of the electorate. It is a howl for the past rather than a serious fight for the future.

Must-Read: Bill Emmott: The Great Emerging-Market Bubble: “if convergence and outperformance were merely a matter of logic and destiny…

…that logic ought also to have applied during the decades before developing-country growth started to catch the eye. But it didn’t…. The main determinants of an emerging-economy’s ability actually to emerge, sustainably, are politics, policy and all that is meant by the institutions of governance…. Countries can ride waves of growth and exploit commodity cycles despite having dysfunctional political institutions, [but] the real test comes when… a country needs to change course. That is what Brazil has been finding so difficult…. Since 2010, got stuck not because of bad luck, or any loss of entrepreneurial spirit in its private sector, but because of… Brazil’s government… unwilling or unable to cut back its bloated public sector, has been mired in vast corruption scandals, and yet… Dilma Rousseff continues to evince a fondness for just the sort of state-led capitalism that leads to exactly these problems. The democracies of Brazil, Indonesia, Turkey, and South Africa are all currently failing to… mediate smoothly between competing interest groups and power blocs in order to permit a broader public interest to prevail… so that resources move from uses that have become unprofitable to ones that have a higher potential…

Must-Read: James Forder: Nine Views of the Phillips Curve: Eight Authentic and One Inauthentic: “There is a widely believed but entirely mythical story…

…to the effect that the discovery of ‘the Phillips curve’ was, in the 1960s and perhaps later, an inspiration to inflationist policy. The point that this is a myth is argued in Forder, Macroeconomics and the Phillips curve myth, OUP 2014. One aspect of the explanation of how that myth came to be widely believed is considered in this paper. It is noted that the expression ‘Phillips curve’ was applied in a number of quite distinct and inconsistent ways, and as a result there was, by about 1980, an enormous confusion as to what that label meant. This confusion, as well as the multiplicity of possible meanings, it is suggested, made the acceptance of the myth much easier, and is therefore part, although only part, of the story of its acceptance.

Must-Read: Paul Krugman: Eternal Greece: “Matt O’Brien directs us to a Heritage Foundation economist [Romina Boccia] presenting what is portrayed as a startling idea…

…America could become Greece!… There probably haven’t been more than a few thousand articles issuing the same warning in the five (5) years since Alan Greenspan published ‘US Debt and the Greek Analogy‘, with this immortal complaint:

Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.

But Matt misses the truly wonderful part about the latest from Heritage…. You might think that debt worriers would try to put the whole 90-percent debacle behind them…. [As] I’ve noted in other contexts that the right never gives up an argument…. They add new arguments, but the old ones never go away no matter how ludicrously wrong they’ve proved.

The situation is actually worse than Paul says…

The deficit hawks never give the natural answer–that the bond market will tell us when it is time to worry about the debt. In my inbox, from CQ:

Where Is the Tipping Point for U.S. Debt?: “Depending on who is speaking, the United States will either become the
next Greece…

…or for years to come remain the unchallenged, undisputed financial champion. But even nonpartisan experts can’t say for sure. That raises the questions: Where is the panic point for the U.S. government on debt and deficits? And would there be enough warning to alter course before reaching the fiscal abyss?

Bob Sunshine, deputy director of the nonpartisan Congressional Budget Office, says the United States “is not Greece.” That’s promising, right? Not so fast. He followed that up with this qualifier Monday during a Center for a Responsible Federal Budget-sponsored event: “Yet.” Given his organization’s projected levels of federal government spending and revenue, and the resulting debt and deficits, Sunshine says “over time, there is an increased risk of a fiscal crisis.” CBO projects federal deficits to remain around 3 percent of the gross domestic product for the next few years, then rise starting at the end of this decade. Deficits refer to the difference between the amount the government spends and the amount it takes in; debt refers to the money borrowed by the government to pay its bills when running a deficit.

What’s more, the organization estimates government spending growth will outpace revenue growth between today and 2030, which “pushes debt up a lot.” How much is a lot? CBO projects the U.S. by 2030 could have debt levels comparable to those right after World War II. After the war, U.S. debt levels peaked at just over 100 percent of GDP. Before that, there was only other one time in U.S. history when levels were as high as the office’s estimates: the late 1700s. Come 2040, under current laws and policies, the office estimates America’s debt will hit 107 percent of GDP. (The current debt level is around 70 percent of gross domestic product.) Major health care programs and Social Security are major factors in spending growth, CBO says.

Experts say a big driver of the Greek meltdown was global financial markets losing confidence in the government’s ability to service its debts. “We still aren’t being pressed by markets,” Maya MacGuineas, CRFB president, said of the U.S. “But Greece does show what happens when you don’t get out in front of markets.” But at what level of debt would markets get jittery enough to trigger an American crisis? “No one knows,” Sunshine said. “There’s no clear tipping point for any country.

“Members of Congress ask us, ‘At what point should we be concerned?’” Sunshine said. “And our answer is, ‘We don’t know.’” Asked if the United States might be safe from a Greece-like crisis — no matter how high its debt level climbs — Sunshine replied: “We haven’t found any basis for saying yes or no to that.” The CBO deputy director noted it might be acceptable for the country’s debt to remain steady around 70 percent of GDP. But what happens if an emergency like the 2008 financial slowdown drives it above 100 percent for years? MacGuineas offered a colorful, if jolting, answer, comparing that scenario to this question: How does it feel when a dog’s invisible fence collar shocks a human? “Nobody knows,” she quipped, “but we don’t want to find out.”

Must-Read: Solow back in 1979 sets out three possibilities: (1) that the New Classicals are right (although he really does not think so); (2) that changing economic structure means that–even though the New Classicals are wrong–there is next to nothing to be salvaged from the Neoclassical synthesis project; or (3) that only minor tweaks–adaptive expectations in the Phillips Curve, supply shocks–are needed to existing approaches.

And, of course, it is important to register that Solow’s (3) was right. With minor tweaks, the models continued to track in useful ways. The next substantial miss in the models after the 1970s came after 2009, when inflation expectations failed to fall…

Robert Solow (1979): Summary and Evaluation (1979): “I have to confess that I haven’t had any blinding revelations in the last two mornings…

…but I have learned some useful things. What really brings us here is Steve McNees’ picture of the 1960s and the 1970s…. McNees documented the radical break between the 1960s and 1970s. The question is: what are the possible responses that economists and economics can make to those events?

One possible response is that of Professors Lucas and Sargent. They describe what happened in the 1970s in a very strong way with a polemical vocabulary reminiscent of Spiro Agnew. Let me quote some phrases that I culled from their paper: “wildly incorrect,” “fundamentally flawed,” “wreckage,” “failure,” “fatal,” “of no value,” “dire implications,” “failure on a grand scale,” “spectacular recent failure,” “no hope.” Now if they were doing that just to attract attention, for effect, so that people don’t say “yes, dear, yes, dear,” then I would really be on their side. Every orthodoxy, including my own, needs to have a kick in the pants frequently, to prevent it from getting self-indulgent, and applying very lax standards ds to itself.

But I think that Professors Lucas and
Sargent really seem to be serious in what they say, and in turn they have a proposal for constructive research that I find hard to talk about sympathetically. They call it equilibrium business cycle theory, and they say very firmly that it is based on two terribly important postulates–optimizing behavior and perpetual market clearing. When you read closely, they seem to regard the postulate of optimizing behavior as self-evident and the postulate of market-clearing behavior as essentially meaningless. I think they are too optimistic, since the one that they think is self-evident I regard as meaningless and the one that they think is meaningless, I regard as false.

The assumption that everyone optimizes implies only weak and uninteresting consistency conditions on their behavior. Anything useful has to come from knowing what they optimize, and what constraints they perceive. Lucas and Sargent’s casual assumptions have no special claim to attention. Even apart from all that, I share Franco Modigliani’s view that the alarmism, the very strong language that I read to you, simply doesn’t square with what in fact actually happened. If you give grades to all the standard models, some will get a B and some a B minus on occasion, especially for wage equations, but I don’t see anything in that record that suggests suicide….

A second possibility is not to go so far as Lucas and Sargent in crying catastrophe, but to suppose that the underlying socio-economic structure has changed. Of course it is always possible, and I believe that this is what Lucas and Sargent would do, to define the structure of the economy as what doesn’t change. I think that tactic is futile because it asks more of economics than economics can ever possibly deliver…. Another possible response to the events of the 1970s is to suppose that the doctrines of the 1960s were right for the 1960s, and that the situation has changed…. It is possible that what happened between the 1960s and the 1970s is a kind of loss of virginity with respect to inflationary expectations. That doesn’t mean that it cannot ever be regained. It may be that, if we could only get back to stable conditions for a while, the 1960s might come around again. Needless to say, I am not very confident about that. I also suspect that Lucas and Sargent have a good point about the game between the government and the private sector…. It is not a wholly unreasonable story to tell, that the theories and doctrines of the 1960s were right for the 1960s, only, as in the old television program, they were bound to self-destruct after some interval of time.

There is still another, even less cataclysmic, line of thought…. Macroeconomics had devoted almost all of its efforts to refining its understanding of the components of aggregate demand… [and] had utterly neglected to elaborate the supply side of the models. Not surprisingly, then, the sequence of supply shocks in the 1970s from the side of food, oil, nonfuel minerals, and the depreciation of the dollar caught the macroeconomics community by surprise…. It is possible to rebuild the supply side of macro-models so that they do tell a consistent story…. So fast does the economics profession move now that there are already text books that do the supply side quite adequately…. The fact that you can reconstruct macro models by paying a little more attention to the supply side… is certainly better news… than if that could not be done. But I do want to caution you that it is not very good news, because you can almost always patch up a model after the fact. The question really is whether it will hold up into the next decade when the next unexpected event comes along. I think it might…