…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.

1440 words

Paul Krugman has been on a serious roll this weekend. All worth reading and pondering:

• 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.”
• History and Policy Failure http://krugman.blogs.nytimes.com/2015/01/12/history-and-policy-failur: “I’ve been having a hard time reading Barry Eichengreen’s Hall of Mirrors… a very good book…. But the recent history is painful, because I was watching in real time, warning desperately that what did happen, would happen…”
• Deflation As Betrayal http://krugman.blogs.nytimes.com/2015/01/10/deflation-as-betrayal: “southern Europe played by the rules [of the Euro], but in its time of need the rules [of the Euro] were changed, hugely to its disadvantage…”
• Orthodoxy, Heterodoxy, and Ideology http://krugman.blogs.nytimes.com/2015/01/10/orthodoxy-heterodoxy-and-ideology: “Not that there’s anything wrong with being heterodox… but a lot of what we’ve been seeing misidentifies the problem… gives aid and comfort to the wrong people…. Standard macroeconomics does NOT justify the attacks on fiscal stimulus and the embrace of austerity…austerians had to throw out the models and abandon statistical principles to justify their claims…”
• Where Are The Friedmans Of Yesteryear? http://krugman.blogs.nytimes.com/2015/01/10/where-are-the-friedmans-of-yesteryear: “Modern conservatism doesn’t have Friedman-like figures…. Who would be the conservative counterparts [to Stiglitz and me]? Who gets cited by, say, Republican governors seeking authority for their tax cuts, or published on a regular basis on conservative opinion pages? I’d say Stephen Moore and Arthur Laffer…. And it’s not as if Moore and Laffer are guys who may lack academic cred but have proved themselves as working analysts…”
• Reaganomics Undefended http://krugman.blogs.nytimes.com/2015/01/12/reaganomics-undefended: “this piece by Robert Samuelson, attacking me over my debunking of the Reagan legend, is really strange… Samuelson declares me ‘totally wrong,’ then seems to agree with me about the economics…”
• Emerging Markets After The [Taper] Tantrum :
  “The [taper] tantrum has subsided, and US interest rates have retraced much of their rise. But EM currencies haven’t rebounded… One guess is that we’re seeing retroactive evidence that the EM thing was a bubble…”
• [For the Love of Carbon http://www.nytimes.com/2015/01/12/opinion/paul-krugman-for-the-love-of-carbon.html: “Why is this environmentally troubling project an urgent priority in a time of plunging world oil prices? Well, the party line, from people like Mitch McConnell, the new Senate majority leader, is that it’s all about jobs…. [But] you can’t consistently claim that pipeline spending creates jobs while government spending doesn’t…. If Mr. McConnell and company really believe that we need more spending to create jobs, why not support a push to upgrade America’s crumbling infrastructure? So what should be done about Keystone XL? If you believe that it would be environmentally damaging… you should be against it, and you should ignore the claims about job creation. The numbers being thrown around are tiny…. The jobs argument for the pipeline is basically a sick joke coming from people who have done all they can to destroy American jobs…”
  

Must- and Shall-Reads:

• Neil Irwin:
  The Depression’s Unheeded Lessons: A Review of Barry Eichengreen’s Hall of Mirrors
• Max Roser:
  World Income Distribution: 1820, 1970, 2000

1. Simon Wren-Lewis:
   On the Monetary Offset Argument):
   “A number of us are highly critical of moving to austerity so early in the recovery from the Great Recession. Market Monetarists… argue… the ZLB is not a problem…. I want to make a couple of observations. First, MM often [wrongly] imagine that they invented this offset argument…. Second, if you… want to take the MM argument seriously, you have to believe that monetary policy is [as] capable of offsetting the impact of austerity as much now as later… [and] that this is actually what monetary policy makers will do. If you believe the first, but are not sure about the second, then fiscal consolidation now is a mistake…. [This] exposes how weak the MM argument is at the ZLB…. Central banks at the moment are inflation targeting, and are likely to continue to do so, so enacting fiscal contraction in the hope that they might change is highly irresponsible. So the MM argument that the ZLB does not matter has to rely on Quantitative Easing (QE). But here there is a basic problem that MM has never to my knowledge answered. Just how much QE do you do to offset any fiscal contraction? We have no real idea, because we have so little experience…”
   

2. James Pethokoukis:
   Should Republicans Ignore Income Inequality? | National Review Online:
   “Inequality has increased across advanced economies. Macro factors such as globalization and technology deserve most — but maybe not all — of the ‘blame.’ Big Government loves to pick winners and losers in the private sector. Some lucky ducks owe their place in the 1 percent or 0.1 percent or 0.01 percent to federal favoritism. Conservatives shouldn’t mind at all when value-creating innovators and entrepreneurs strike it rich while crony capitalists do not. The precious tax breaks and subsidies that go to rent seekers, such as those in the agriculture and alternative-energy sectors, should get the ax. Sorry, Big Sugar and Big Solar…”
   

3. Kevin Drum:
   Non-Chart of the Day: Where’s the Austerity? | Mother Jones:
   “Tyler Cowen… [and] Angus…. ‘Either austerity means nominal cuts and we never had any of it, or austerity means cuts relative to trend and we are still savagely in its grasp.’ Oh come on…. Let’s take a look at this chart done right… real per capita government expenditures…. This is what austerity looks like: a drop in government expenditures. For a little while, in 2009 and 2010, stimulus spending partially offset… but by the third quarter of 2010 the stimulus had run its course…. If you run this chart back for 50 years you’ll never see anything like it…. Finally, in 2014, the spending decline stops. Austerity is over, and we even start to see a small uptick. At the same time, the economy starts to pick up. This is not bulletproof evidence that austerity is bad for the economy, or that government spending helps it. But it’s certainly consistent with the hypothesis, and it’s really not hard to see.”
   

Should Be Aware of:

• John Mondragon:
  Household credit and employment in the Great Recession
• Chirag Mehta:
  Tip of My Tongue

1. Matthew Yglesias:
   I read the French far-right party’s platform, and it gets one big thing absolutely right:
   “At some point, European leaders have to face up to the fact that it’s not all nuttiness and racism. Voters are turning to extreme parties because the mainstream parties have blundered into a years-long economic fiasco and they have no plan to end it…. The party’s founder — Marine Le Pen’s still-living father — was a fascist street-brawler as a youth, managed Jean-Louis Tixier-Vignancour’s Vichyite presidential campaign in 1965, and traffics in not-at-all-disguised racism. In its current incarnation, the Front advances a genuinely extreme view on immigration (a 95 percent reduction in legal immigration levels), promotes anti-Muslim politics under the guise of secularism, and clearly practices dog whistle politics intended to appeal to a racist constituency (hardly a unique tactic)…. In other respects, though, the party is not so extreme… hike military spending… build more prisons, discourage abortion, ban same-sex marriages, and ban affirmative action — fairly standard conservative ideas in the US. On finance, Le Pen sounds like Elizabeth Warren, calling for a separation of investment and commercial banking (Glass-Steagall rules, in US terms) and a financial transactions tax. They bemoan the privatization of public services. On the welfare state, they chart a third way. The (dubious) central premise seems to be that once you massively curtail legal and illegal immigration alike, affordability questions go out the window. Mothers of three or more children will secure earlier access to full social security benefits, family allowances will be raised, and more preschool funding provided. They claim (again, dubiously) that protectionist tariff policy will promote the re-industrialization of France…. But beyond this ideological grab-bag is a thoroughgoing and persuasive critique of European monetary arrangements… cite Milton Friedman as an authority on the idea that the Eurozone is not an optimal currency area… rightly say that the inability of Eurozone member states to conduct independent monetary policy ‘condemns the people to austerity plans that do nothing but exacerbate the crisis’… call for the Bank of France to print money to cover French budget deficits. That’s a step that could be dangerous in many scenarios, but given that France is currently experience negative inflation it seems well worth trying. There’s much to dislike in the National Front’s policy gestalt…. But the Europe stuff deserves an answer…. The Eurozone is fundamentally a political project rather than an economic one, but to succeed politically it needs to work economically. Right now it isn’t, and Le Pen’s brand of populist nationalism is a logical alternative…”
   

Simon Wren-Lewis explains better than I ever have why the Market Monetarist and other arguments that fiscal policy at the ZLB is unnecessary partake 100% of the how-many-angels-are-dancing-on-the-head-of-this-pin nature…

Simon Wren-Lewis:
On the Monetary Offset Argument):
“A number of us are highly critical…

…of moving to austerity so early in the recovery from the Great Recession. Market Monetarists… argue… the ZLB is not a problem…. I want to make a couple of observations. First, MM often [wrongly] imagine that they invented this offset argument…. Second, if you… want to take the MM argument seriously, you have to believe that monetary policy is [as] capable of offsetting the impact of austerity as much now as later… [and] that this is actually what monetary policy makers will do. If you believe the first, but are not sure about the second, then fiscal consolidation now is a mistake…. [This] exposes how weak the MM argument is at the ZLB…. Central banks at the moment are inflation targeting, and are likely to continue to do so, so enacting fiscal contraction in the hope that they might change is highly irresponsible. So the MM argument that the ZLB does not matter has to rely on Quantitative Easing (QE). But here there is a basic problem that MM has never to my knowledge answered. Just how much QE do you do to offset any fiscal contraction? We have no real idea, because we have so little experience…

When there are negative externalities out there–political-military from boosting the incomes of not-very-friendly state actors like Muscovy and nonstate actors like Al Qaeda, narrow-environmental from local pollution, and broad-environmental from global warming–we like for the government to provide subsidies. Thus this from the usually-reliable James Pethokoukis strikes me as way, way, way off–subsidies for “Big Solar” are no more a problem than is the excessive power over our political system wielded by Big Poor Children:

https://www.icloud.com/keynote/AwBUCAESEDBM_vLkLCQgT0Nu6oV4ZSsaKde5vm771OMPZatz7f4g5QMkCxthNIhPQ4-dDpWFxltBtWRq4rjoXxe_MCUCAQEEIEnMxkSumJovn1H0CTuhapGtUDqrCSAHUbr3ycqNRe1P#2014-11-13_INET_Presentation.key

Economic Methodology, Economic History, and Economic Thinking

Creating and supporting intellectual spaces in which insightful thoughts about how the economies of the present and the future work can be thought. As I see it, this requires combining a broad catholic range of empirical and theoretical inputs with effective quality control. But how?

Four Gaps:

• Between what economists should say and what they do say
• Between what economists do say among themselves and what they are heard to say outside the community
• Between what economists are heard to say and what the public sphere concludes
• Between what the public sphere concludes and what policies are actually implemented
• Concentrate for now on the first two

What Went Wrong?:

• In the development of economic theory
• In the application of theory to policy before 2008
• In the application of theory to policy since 2008
• What economics was relevant?
  • Larry Summers and Martin Wolf at Bretton Woods
  • Bagehot, Minsky, Kindleberger
  • (Eichengreen, Akerlof, Woodford)

What Is Good and Bad Theory?:

• Good theory is and can be nothing other than crystalized history
• Microfoundations from first principles?
  • Paul Dirac’s relativistic electron’s magnetic moment: 1, 1.00118, 1.00115965221±4
  • Does this help us with protein folding and pharmaceutical molecule design?
  • Isaac Newton: “I can calculate the movement of the stars, but not the madness of men”
    • Lost £20000
  • True then, true now

Bad Theory:

• Assuming infinitely-lived rational-expections representative agents
• Waving your hands
• Hoping that all heterogeneity and frictions will cancel out
• Almost as bad theory
  • Assuming ILRERA
  • Adding one friction
  • Hoping that all other heterogeneity and frictions will cancel out
• Robert Solow:
  • “Attaching a realistic or behavioral deviation to the Ramsey model does not confer microfoundational legitimacy on the combination”
  • “Quite the contrary: a story loses legitimacy and credibility when it is spliced to a simple, extreme, and… irrelevant special case”

Two Branches:

• Creating space to build better economic theory * Better communicating economic theory
• Second branch easier

Second Branch: Better Communicating Economic Theory:

• What does history teach us?
• Keynes: The End of Laissez-Faire
  • J.R. McCulloch’s parrot
  • Triumph of the popularizers
  • Marketeers: markets are efficient, governments are incompetent or corrupt
  • In Keynes’s day there were planners: governments harness collective purpose to technocratic plans, markets are wasteful
• Need a grammar of forms of organization–market, hierarchy, plan, collective, yardstick competition, regulated monopoly, etc.–and when they work and when they do not
• Consider that, historically, education, health, pensions, infrastructure, technology, security not amenable to market provision–and that those are growing

First Branch: Space to Build Better Economic Theory:

• Knowledge of history the sine qua non
• Catholic approach to modeling strategies–broadening the tool set
• Somehow, exercising effective quality control