The very sharp John Plender makes what is now the standard–but I believe incoherent–argument that central banks are doing bad things with quantitative easing and need to reverse it and raise interest rates. They need to do so, Plender thinks, even though doing so will reduce spending, raise unemployment, put downward pressure on wages and prices, and increase risk in a world that still appears to be grossly short of risk bearing capacity. So it is natural to ask: “Why?” What is the upside supposed to be? Is there an upside aside from believing that this will make it easier for investment managers to report black rather than red numbers to their clients while still holding safe Treasury bond-based portfolios?

That Plender’s argument is incoherent is, I think, demonstrated by the fact that markets do not respond as he thinks he should–he saw the end of large-scale US QE coming at the start of 2013, and confidently predicted a fall in US Treasury bond prices that simply has not happened.

The way I see it is this: The root problem is an inability of financial intermediaries to stand behind or to credibly assess risks, and so a reluctance on the part of investors to provide the factor of production of risk-bearing to the marketplace. Pushing safe interest rates way, way, way down and then pushing the supply of risk-free assets that the private sector can hold way, way, way down provides a form of Dutch courage to otherwise reluctant investors: even though they don’t trust financial intermediaries’ risk assessments, the low rates on and low volumes of safe assets give them no alternative. The long-run problems are twofold: First, safe interest rates expected to be very low for a long time artificially boost the value of long-duration assets–so capital is misallocated and we wind up with a capital structure that has in it too many long-duration relatively-safe projects that make at best very small contributions to societal well-being. Second, the demand for risky assets just generated is not a well-based demand for soundly-analyzed risks but rather for any priced risk at all–so the market becomes vulnerable to Ponzi and near-Ponzi finance.

From my point of view, however, the proposed cure of higher unemployment, lower demand, and greater fundamental risk from continued and deeper depression is worse than the disease. First best would be fixing the credit channel so that financial intermediaries would be able to stand behind risks they have credibly assessed. Second best is having the government take over and be a financial intermediary–have it borrow and spend, accepting that its spending will to a certain degree follow a political logic of greasing powerful and squeaky wheels more than amplifying wealth. Third best is continuing QE. Worst is attempting to revert to normal interest rates without financial policy to fix the credit channel or fiscal policy to maintain demand near normal-employment levels.

Jo Walton: The Just City

Must- and Shall-Reads:

• Jared Bernstein:
  So why aren’t wages responding to the tightening job market?
• Richard Kahlenberg:
  The Genius of Obama’s Two-Year College Proposal
• Jim Tankersley:
  Why America’s middle class is lost
• John Makin:
  Fed too complacent on US deflation damage
• Peter Orszag:
  What Brill’s ‘Bitter Pill’ Gets Wrong on Obamacare

1. Réka Juhász:
   Temporary Protection and Technology Adoption: Evidence from the Napoleonic Blockade:
   “I find that, in the short-run, regions in the French Empire which became better-protected from trade with the British for exogenous reasons during the Napoleonic Wars… increased capacity in… mechanised cotton spinning to a larger extent than regions which remained more exposed to trade. Temporary protection had long term effects…. Firms located in regions with higher post-war spinning capacity were more productive 30 years later…. After… peace, exports of cotton goods from France increased substantially, consistent with evolving comparative advantage in cottons…. As late as 1850, France and Belgium… had larger cotton spinning industries than other Continental European countries… not protected from British trade during the wars…”
   

2. Aaron Carroll:
   Philip Klein’s Overcoming Obamacare:
   “Philip Klein wanted to write a book that sums up competing schools of thought from conservatives as to what to do about Obamacare, and he succeeds. I can recommend it without reservation. But in doing so, I think he shows the relative seriousness of those schools of thought. In the Reform School, we see incredibly detailed plans (like those of Roy) where numbers have been run and tradeoffs calculated. There are things that conservatives want, and things they’re willing to concede. The Replace School is better considered than I had previously thought, but a little less detailed (and, perhaps, a little less realistic). The Repeal School, however, left me feeling like it was just a political ploy, with hand-waving to old studies (which barely applied) and old ideas like ‘HSAs can fix everything’. I’m curious to see if others agree. Bottom line, Klein is a talented journalist and writer who gave me some insights into what conservatives are thinking. Well worth my time. Likely worth your time, too.”
   

3. Wolfgang Münchau:
   Eurozone Must Act Before Deflation Grips:
   “Deflation in the eurozone has nothing to do with the price of oil. Its cause is a series of policy errors over several years–the interest rate increase in 2011, the failure to act when inflation rates dropped off a cliff in 2013 and the pursuit of austerity in a recession. If the European Central Bank had met its inflation target of ‘close to but below 2 per cent’, the oil price collapse would have been harmless…. A year ago it was said that the eurozone was only one shock away from deflation. Since then, we have had two: Russia’s aggression against Ukraine and the fall in the oil price. Shocks happen…. But beware the second-round effects, those that come with a delay. There are already signs that German pay negotiators are dropping the ECB’s 2 per cent inflation target in their wage formulas…. My expectation is that QE will fall short for a number of reasons. The size of the purchases may not be large enough… may simply not work as well in an economy with a smaller capital market and a different system of housing finance…. A helicopter drop would work but sadly, I fear, it would be too unconventional for the continental European mind. A slightly more realistic possibility would be a combination of QE, an external stimulus from oil and a fiscal boost…”
   

4. Paul Krugman:
   On Econoheroes http://krugman.blogs.nytimes.com/2015/01/12/on-econoheroes:
   “Joe [Stiglitz] and I do tend to get quoted, invoked, etc. on a frequent basis in liberal media and by liberals in general, usually with (excessive) approbation…. [The] people playing a comparable role in right-wing discussion… tend not to be highly cited or even competent economists. So don’t tell me that Greg Mankiw or Robert Barro are famous economists and also conservative. Indeed they are. But are they omnipresent on the conservative scene?… ‘mankiw economy’… get[s]… 5200 hits… ‘stephen moore economy’… get[s] 65,700… ‘stiglitz economy’… get[s] 43,800…. This [is] a real asymmetry…. The right does not turn to these eminent conservative economists for guidance and support; it prefers the hacks.”
   

5. 
   Paul Krugman:
   History and Policy Failure:
   “I’ve been having a hard time reading Barry Eichengreen’s Hall of Mirrors… It seems to be a very good book…. But the recent history is painful…. You often hear assertions to the effect that in early 2009… we didn’t know how deep and prolonged the slump would be… how much damage would be done by the pivot to deficit reduction. So it must be said: What do you mean ‘we’, white man?…. Up through 2011 the CBO… was… more pessimistic than what actually happened…. Thereafter CBO predicted a faster recovery… but even so CBO didn’t expect the output gap to go away until around now…. Conventional est… [gave] ample… [warning] that the proposed stimulus was inadequate and that 2010 would be way too soon to pivot to deficits…. It’s true that for years elite discourse was dominated by the worry that we were doing too much, that deficits and easy money were dangerous, that we were risking debt crisis and inflation. Now, seemingly suddenly, the Very Serious People have realized that in reality we did too little, that deflation and stagnation are looming as the great dangers, and there are cries of ‘Who could have known?’ Well, everyone could and should have known. I certainly did.”
   

Should Be Aware of:

• Eileen Shim:
  Psychologists Have Uncovered a Troubling Feature of People Who Seem Nice All the Time – Mic
• J.F.:
  America’s prison population: Who, what, where and why
• Meagan Hatcher-Mays:
  WSJ Just Realized The Anti-ACA Lawsuit It’s Pushing Could Be Ruinous For Americans–Including Republican Voters
• Noah Smith:
  Ross Douthat ponders the Liberal Marriage Hypothesis

1. Eric Eisenberg:
   Un-Awesome: Golden Globes Stupidly Pass Over The LEGO Movie:
   “Calling the Golden Globes’ choice incorrect shouldn’t be translated as an insult to Dean DeBlois’ How To Train Your Dragon 2, as I actually enjoyed that film immensely when I saw it this past summer, but The LEGO Movie’s positive aspects really outweigh it all around. I will give the DreamWorks feature plenty of credit for being an adventures piece of storytelling and stunning to look at, but the immense creativity and originality of Warner Bros.’ film leaves really no comparison, and it’s a shame that it wasn’t rewarded for it. Interestingly, it’s the ‘F’ in HFPA that may very well have prevented The LEGO Movie from taking home this award – which it very rightly deserved. While Phil Lord and Chris Miller’s animated feature was a huge hit here in the United States – ranking as the fourth biggest domestic hit of the year with an impressive $257 million pull – the film didn’t really translate abroad…. It’s very possible that this sway was reflected in the voting for the Golden Globes…”
   

2. Daniel Davies and Tess Reed:
   Sweaty January and how gyms make money:
   “Having seen the books of a gym chain or two, we can tell you that the ‘Sweaty January’ phenomenon is not an urban myth or a joke — it’s absolutely fundamental to the economics of the industry and it’s basically impossible to run an economically viable gym without taking it into account. Usually about 75 per cent of all gym memberships are taken out in the month of January. Not only this, but the economics of the industry absolutely depend on the fact that a very great proportion of January joiners will not visit more than three or four times in total before their membership comes to a floundering flop of weight not lost at the end of the year…”
   

…that sums up competing schools of thought from conservatives as to what to do about Obamacare, and he succeeds. I can recommend it without reservation. But in doing so, I think he shows the relative seriousness of those schools of thought. In the Reform School, we see incredibly detailed plans (like those of Roy) where numbers have been run and tradeoffs calculated. There are things that conservatives want, and things they’re willing to concede. The Replace School is better considered than I had previously thought, but a little less detailed (and, perhaps, a little less realistic). The Repeal School, however, left me feeling like it was just a political ploy, with hand-waving to old studies (which barely applied) and old ideas like ‘HSAs can fix everything’. I’m curious to see if others agree. Bottom line, Klein is a talented journalist and writer who gave me some insights into what conservatives are thinking. Well worth my time. Likely worth your time, too.

I must say, I am surprised to see Robert Samuelson claiming that the Federal Reserve and the Reagan administration were in accord in 1982…

Let’s roll the videotape:

I went to the New York Times archives and searched for mentions of Reagan and Volcker in the same article in 1982. The first four results that came up were:

1. Howell Raines: G.O.P. Chiefs Warn Reagan on Budget–See Possible Shift:
   “Paul A. Volcker, chairman of the Federal Reserve Board, told the Senate Banking Committee today that the prospect of the big deficits for the next several years posed a threat to the financial markets. He suggested a combination of new taxes and spending cuts to achieve a $20 billion decrease in the 1984 deficit…”

2. Jonathan Fuerbringer:
   Reagan and Volcker in Talks: “President Reagan and the chairman of the Federal Reserve Board, Paul A. Volcker, met Monday…. The meeting comes after recent tension between the Fed and the Administration, highlighted by the Administration’s contention that the Fed’s erratic management of the money supply was pushing up interest rates and Mr. Volcker’s response that it is the threat of large budget deficits that is affecting interest rates…. Senator Howard H. Baker Jr., the Senate majority leader, recently called for a meeting between Mr. Reagan and Mr. Volcker to coordinate economic policy…. Many economists outside the Government say that the Fed and the Administration are on a collision course on economic policy because the tight monetary policy promised by the Fed will not allow for the relatively strong economic growth the President has forecast…. Mr. Volcker in an interview Sunday said that he did not think the economy would come ‘roaring’ back, as Treasury Secretary Donald T. Regan predicted…. David R. Gergen, director of communications, even refused to confirm whether the meeting had taken place…”

3. Jonathan Fuerbringer:
   Aides Minimize Reagan’s Remark: “The Reagan Administration and the Federal Reserve today sought to play down the President’s apparent breach of confidence Tuesday when he said that Paul A. Volcker, chairman of the Federal Reserve Board, had told him that interest rates would drop by three to four percentage points by summer…. Reagan said the Fed chairman had made the prediction during a private talk between the two. Senators at Tuesday’s meeting repeated the forecast afterward…. One Administration official said the President wanted to make clear that he had not intended to violate the confidence of a private meeting…. The White House apparently was also concerned because the President may not have quoted Mr. Volcker accurately or fully…”

4. Steven Weisman: Reaganomics and the Presidents’ Men:
   “As the economy went into its nose dive Secretary of the Treasury Donald T. Regan publicly questioned the wisdom of the Federal Reserve Board’s tight-money actions; perhaps Chairman Volcker had overdone things, he said. Yet it was an awkward position to take. From the start, Mr. Volcker had the President’s blessing for his tight-money policy, and the Fed chairman had frequently made clear his conviction that the Administration should do its part in combatting inflation by curbing the deficit. This the President had failed to do. Mr. Volcker told an associate that he found Secretary Regan’s criticism ‘astounding’…”

This is much more consistent with Paul Krugman’s story than with Robert Samuelson’s. In these stories, Paul Volcker is openly and publicly opposed to Ronald Reagan’s supply-side fiscal policies as creating a risk of forcing him to either abandon his fight against inflation or accept a permanent low-investment economy with slow growth. The Reagan administration as a whole is quietly and sotto voce via leaks blaming high interest rates and consequent high unemployment on “erratic management of the money supply” by Paul Volcker. The Reagan Treasury Department under its head Don Regan and the Republican Senate majority under its head Howard Baker are openly and publicly opposed to Paul Volcker’s tight-money fight-inflation-first policy. Ronald Reagan in his private meetings with Paul Volcker appears to be pressing him to promise that interest rates will come down–and come down soon.

As I understood it then and understand it now, five things were happening:

1. Paul Volcker was trying back in 1982 to do what Alan Greenspan did in 1993–to condition a lower interest-rate policy on the administration’s taking the first step and committing to long-term deficit reduction, and the Reagan administration was stonewalling.
2. Ronald Reagan’s Treasury Department was engaged in a quiet and seeking a public administration-wide Reagan-led campaign to convince the Federal Reserve to lower interest rates.
3. Ronald Reagan’s communications staff was engaged in a quiet campaign to convince the Federal Reserve to lower interest rates, but was opposed to any public Reagan-led pressure as bad for Reagan’s image as a man in control of the government.
4. Reagan’s Council of Economic Advisors was on Paul Volcker’s side.
5. Reagan’s own personal papers are singularly unilluminating as to what he thought and was trying to do.

Does this seem to you like a situation fairly and accurately portrayed by Robert Samuelson’s:

[Reagan supported the Fed…. ‘I have confidence in the announced policies of the Federal Reserve.’ This patience enabled Volcker to succeed…. It’s doubtful that any other plausible presidential candidate, Republican or Democrat, would have been so forbearing…. There were many congressional proposals… to curb the Fed’s power, lower interest rates or fire Volcker. If Reagan had endorsed any of them, the Fed would have had to retreat…. Volcker and Reagan accomplished… an economic and political triumph… showed that leaders can take actions that, though initially painful and unpopular, served the country’s long-term interests.

?

No. It doesn’t seem that way to me either.

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