Discussion: How Mainstream Economic Thinking Imperils America

Ylan Mui: I want to kick it off with a question to you Josh. There have been a lot fingers pointed when it comes to blame for the financial crisis–Wall Street greed, predatory lending, et cetera–but rarely has a finger been pointed at the economists themselves. Do you think your profession deserves blame?

Josh Bivens: The one word answer is yes. Jeff’s book is entirely right: most the ideas covered in his book have indeed been put to damaging use in US policy debates. But we should be careful to also say that a lot of the ideas actually contain useful nuggets. They are bad and dangerous ideas when they are improperly invoked—-when the people who invoke them cannot differentiate when one of the ideas should be taken as a description of how the world works versus a prescription for how we should make it work. That is one big way that they can be put to dangerous use. I can say more about that later. But I think, even more importantly, they are really bad and dangerous when they are mobilized by people… It’s tough to say this nicely… By people with either really weak minds or with old and ideological political motivations.

Let’s get specific: macroeconomics and recession-fighting. Jeff’s second chapter is about the claim that economies have self-correcting properties that keep recessions short and shallow. If it were true, we would not have too much to worry about as far as fighting recessions. This is obviously a dangerous idea. Get really complacent about fighting recessions, and you know what happens: We see the past five years. We see millions of people unemployed and underemployed. We see sluggish wage growth. It is really obvious that the DC policy-making class has been way too complacent about fighting the recession.

I can go off for a long time about the fiscal-policy side as well.

In terms of the question about who deserves the blame: Where are the channels by which bad ideas infect the policy-making process? It is much more than the monetary policy front. The actual monetary policymakers with PhDs have done a much better job than almost anybody else in the US scene in responding to the crisis. mean Ben Bernanke and Janet Yellen have not been excessively complacent. You–we–may have wished they had been more aggressive, that they had seen that the economic world in more of a crisis and had taken stronger action to keep the world economy from being even more engulfed in flame than it has been over the past five years. But they have not been complacent. They have been pushing really hard to do something about the economic crisis.

It is the policymaking backseat drivers–the congressional committees–that summon them and chastise them for setting the stage for hyperinflation. It is the regional Federal Reserve Bank presidents who do the same thing. They are the ones who have been arguing aggressively for more complacence. This divergence between the actions of actual PhD policymakers and others on this front illustrates the channel through which these bad ideas actually infect the policy making process. Have they really hypnotized the minds of professional economists? Have they just become an easy cover for policymakers who do not want to take what professional economists tell them about how to make good policy?

I wish I could say professional economists were totally off the hook–that we are all giving good advice; that it is just Paul Ryan and Rand Paul who are perverting the policy. But we know that is not the case. There are enough economists to keep the water muddy.

I’ll end really quickly here:

I was asked by a reporter, “Can we now take… people who deny that fiscal stimulus at zero interest rates helps an economy recover, can we treat people who deny that like climate change deniers? Can we just say “all experts , and they are completely beyond the pale”? Sadly, no. We cannot. I mean, I think the evidence says we should. There is just not a bigger slam dunk that I have seen in actual evidence as a social scientist. But we can’t. You’ve got people like Greg Mankiw, who defended the Bush tax cuts of 2001 and 2003 on purely stimulative macroeconomic arguments, who then in 2009 when the Obama stimulus is being debated links to every anti-stimulus argument there is. He does not actually endorse each one specifically. But: come on, every day he links to five of crazy ideas why the stimulus is bad.

While I would love to say that Jeff’s bad ideas have not hypnotized economists–that they have just provided a cover for those who want to block the translation from economist wisdom to policy. I cannot. It is just not true that these bad ideas have only provided a useful cover for non-economists going to bat for bad policies.

A last thought: Part of the missing ingredient here–why economists are not useful actors in policy debates–is not just that they hve been suckered by the big big ideas Jeff is talking about. Their is lots of conscious and unconscious class bias among economists that affects how they enter policy debates. I think this is a missing ingredient. I’m sure we can talk more about that later.

Ylan Mui:Brad what do you think? Is the problem the academics or the policy, the description or the prescription?

Brad DeLong: Do you want me to talk about monetary policy, about fiscal policy or about finance? I can do all of them, or one of the three.

Ylan Mui: Why don’t you start with monetary policy? [Laughter]

Brad DeLong: I see four big gaps between where we should be and where we are:

1. The gap between what real economists should be saying about monetary policy, and what I think they do say.

2. The gap between what I think real economists do say and what Jeff thinks real economists do say.

3. The gap between what Jeff thinks real economists do say and what the Washington policymaking and the global policymaking community take real economists to be saying.

4. The enormous gap between what the Washington and the global community thinks real economic wisdom is and the policies that are actually being followed.

All four of those gaps are large. I would say the fourth is the largest. I would say the third is the next to largest. And the first two gaps–well, it seems to me that they are actually not all that huge.

We do not know what Milton Friedman would be saying in this particular conjuncture if he were here with us. He was an unpredictable guy. He was a very smart guy. He was smart both at finding insights into how the world worked and also, unfortunately, finding clever arguments so that he did not have to listen to evidence about how the world worked when it disturbed his beliefs. It is an occupational hazard of people who are a little too book-smart, a little too intellectually-talented. They can get away with plausible rationalizations too easily.

But when Friedman was confronted with a situation like that of the US today, that of Japan in the late 1990s, his policy prescriptions were very clear. Up until then he had counted on the velocity of money to be a relatively stable variable–if not greatly disturbed by extraordinary financial distress. And so he believed that if you simply kept the money stock of the economy on track that would keep total spending on track and would keep the economy stable near its “natural” rate of unemployment.

In Japan in the late 1990s Friedman found himself faced with a situation in which keeping the money stock’s growth path on track did not keep spending in Japan on track. His answer was that in such a case you should throw overboard his constant money stock growth rule. What Japan should do, Friedman said in the 1990s, is print money, Keep printing money. Print more money. Do not care that the short-term interest rates are “too low”. Do not care that long-term interest rates are “too low”. Low interest rates, he said, do not tell you whether money is improperly easy. Only the total level of spending tells you whether money is too easy.

Thus Friedman’s policy advice for Japan in the 1990s was: Massive quantitative easing. If that does not get spending and employment back to where you want it to be, do some more. And if that does not work, do even more. Helicopter drops.

Now it is a fact that there is not one single person on the Board of Governors of the Federal Reserve or in a Federal Reserve Bank President’s job who is right now as far to the “left” as Milton Friedman was in monetary policy [except, perhaps, for the Federal Reserve Bank of Minneapolis’s Narayana Kocherlakota]. They all talk about vague “risks” of excessive quantitative easing. They talk about the importance of the taper and of avoiding excessive growth in the balance sheet. They talk about how their models show convergence to something like full employment over the next three or four years–during which they plan to continue to fail to hit their 2%/year inflation target. They talk about the relatively-rapid soaking-up of excess labor supply through various structural changes in the labor market–which so far have no support anywhere in the wage data.

If Milton Friedman with his opinions of monetary policy in a liquidity trap of 1999–Milton Friedman without his name–were nominated to the Board of Governors of the Federal Reserve right now, I donot think he could get 50 votes. I think he would be regarded as too much of a crazy left-winger. This is an extraordinary situation we find ourselves in. It is one that makes me wake up at night in a cold sweat about one day a week.

Ylan Mui: So, Jeff, do you have any comments or response to their thoughts?

Jeff Madrick: Yeah, sure. I mean I’m sure Brad has a lot of thoughts about other people besides [Inaudible]

Ylan Mui: [Laughter] The other nights of the week he wakes up in cold sweat.

Jeff Madrick: I always remember reading Robert Solow’s criticism of the Friedman and Schwartz Monetary History book, and Solow said: “Well, it’s an odd book that says velocity is one thing during one decade and something totally different in another decade.” It was a little bit hard for him to square this constant-velocity idea with Friedman’s claims about money. I tend to think of money as more endogenously created by business activity than exogenously created. Finally, in terms of Friedman as a left winger, left-wing is not only about stepping on the interest-rate pedal–lowering rates–it’s about regulations. Janet Yellen, I’m very glad to see, as Fed Chairman is talking about how lower interest rates alone might lead to risk but there are other ways to deal with speculative risk that were neglected badly, not just under Greenspan but to some degree under Bernanke, who I have a lot more respect for than for Greenspan. There are regulatory tools, and I doubt if Friedman would be in favor of this kind of capital controls.

Ylan Mui: Well, Jeff, let’s get to a broader question. What exactly are you considering “mainstream”? In your book you cite Stiglitz and Shiller as people who called it right. Certainly they are part of the mainstream economic consensus. So how are you defining this term? There are plenty of people outside the mainstream who I would suggest that you would disagree with too, hardly including these folks of the [Indiscernible] [Cross-talk]

Jeff Madrick: Well, the point of the book is to talk about how the preponderance of economists who teach in major universities–not only on the right but on the left–came to a consensus on these views, and that in effect was my definition of mainstream. By and large it’s the acceptance of neoclassical economics for the most part, with some variation among them. Let me point out that these economists came together in believing in the great moderation. Blanchard was slightly left the center. Bernanke was probably slightly right of center. They both believed in the Great Moderation. They manufacture thed measure of their own success. Economists on the left and the right believed in low and stable inflation as the primary policy objective. That’s what I’m talking about when I talk about “mainstream economics”.

It was a very strong consensus on a lot of issues, I believe. While they did not have their hands literally on the policy levers all the time, very few decisions were made by a president or a Fed Chairman without talking to the economics departments. Economists had a lot of control: their ideas seep through the media and into the general population.

Ylan Mui: We have a question from the audience, which is asking each of the speakers to address the ideal role of government in markets and in national economics. Brad, you want to start with you?

Brad DeLong: Let me start with a parenthesis: In 1992 Larry Summers and I wrote a paper, stood up in front of the assembled Federal Reserve, and said that in our judgement reducing the target inflation rate below 5%/year ran risks that probably should not be run–as shown by the fact that had the inflation rate been significantly lower than the 4%/year or so that it had been in the late 1980s, the Federal Reserve would not have been able to do the expansionary policies it needed to do to fight the 1992 S&L crisis recession. That was a relatively small macroeconomic shock. There were and are large chunks of the mainstream that did not buy into 2%/year as the proper inflation target. Even though you can interpret Olivier Blanchard as not dissenting strongly from that target before 2008, since he has gotten into his post at the IMF has has been dissenting from 2%/year more strongly than anyone else. Olivier Blanchard and his boss Christine Lagarde are now the left-most people on monetary policy in any public-sector organization today. If there is an equivalent of the Sixth Socialist International today, they are it.

On the question of the proper rule of government… There are stringent requirements for market effectiveness for anything like the invisible hand to actually work well.

We need to have the distribution of wealth we start with to correspond to fairness and utility for lots of reasons–straightforward utilitarian reasons, and also that equality of opportunity is a joke without substantial equality of result to support it behind it.

We need to have aggregate demand matched to potential supply.

We need to have competition.

We need to have calculation–that is people need to know what their options are, be able to assess them accurately.

Goods and services need to be rival, in the sense of no public goods or no increase in returns so it actually makes sense to charge prices for them because in consuming a good you are using up some scarce resource.

Goods and services need to be excludable,so that you can actually make price-taking markets function.

There need to be no information asymmetries–no situations in which one side of the market knows a great deal more about what they are buying or selling that the other does.

If those requirements are not all met, then the invisible hand theorem simply fails. Jeff talks about Arrow, Debreu, and Hahn building up the enormous edifice of modern general equilibrium theory. He talks a little less than I would about how the lesson all the three of them drew from it was that these requirements were extraordinary stringent–not to be found very much in the real world.

If we take a look at the world out there, I think we can see decreasing relevance of the Smithian model. As we live longer, we find that more of our economy has to go into pensions and healthcare finance in which problems of miscalculation and myopia on the one hand and of information asymmetry on the other are absolutely enormous. We also are spending a lot more on education. We are spending more on infrastructure as the average lifespan of the goods and services we produce increases, and as interdependencies increase. Research and development and information goods in more general are the heart of where any kind of Smithian invisible hand theorem will fail.

So not only are the requirements for market effectiveness extremely stringent, but they will apply to a smaller share of the economy in the future than they have in the past.

If we are going to right-size the market over the course of the next century, we economists really do need to think very hard. Mostly what we need and what other social scientists need is a grammar of alternative forms of organization. Markets are not the only way to organize things. We have command, we have bureaucracy, we have charity, we have cooperatives, we have Wikipedia, we have regulated monopolies, we have yardstick competition, we have a whole bunch of other things. And if we had a better grammar of where each of these succeeds and where each fails, we would have a much better discussion.

As it is though, we have a bunch of people who yell that government is not competent and fails always. We have some other people who whimper that sources of market failure are relatively strong. Some other people say all you have to do is to cut property rights at the joints in the correct Coasian way. None of those three positions seem to meet to come close to doing the job.

Ylan Mui: Josh, what do you think?

Josh Bivens: Let me focus on just the narrow part of it because I’m narrow minded and to bring it back to Jeff’s…

Ylan Mui: Like a mainstream economist?

Josh Bivens: Yes… Jeff’s second chapter. The proper role of government is huge question. But it seemed like the one that should be pretty much non-ideological and non-partisan. We should at the very least not let the economy founder well below fall employment for a long periods of time. There is no conservative or liberal case for: “Yes, really high rates of unemployment are somehow good”. The minimum government should do macroeconomic management There’s no reason why the response to the big shortfall in demand in 2008 couldn’t have been—were going to zero out payroll taxes for three years. It would’ve worked. It wouldn’t been the most efficient, but it would’ve done something to stimulate the economy. Yet a serious absence of anything like a serious sort of proposal from the right anywhere near the scale of the demand shortfall has led to the five years of just terrible times. I think that’s a little bit of an indication for Jeff’s thesis…

Brad DeLong:& And not just from the right. It was Barack Obama who stood up in his 2010 State of the Union address and said that the time for expansionary fiscal policy is over. That because American households had to tighten their belts so the government needed to tighten its. Christina Romer was out there trying to nail the Obama administration to the position: “No 1937s–no premature withdrawal of expansionary fiscal support from the economy until the recovery is well established.” But right now, if you go over to the White House briefing room, they are talking about how wonderful it is that the deficit has fallen by so much. It has fallen from a level that was appropriate to the state of a macroeconomy to a level that I think is at most a third of what it should be, given the state of the macroeconomy, given the extraordinary shortfall of output below what it ought to be according to any serious measure of the trend of potential, and given the extraordinarily good terms on which the government can borrow right now.

That is: any private organization–any market organization–that could borrow on the terms the US government can borrow right now would be borrowing like mad, and investing and making every single long-term capital investment it was going to make over the next 30 years right now. We ought to do that.

Ylan Mui: I want to get–I want to get Jeff a moment to respond ,but also I want to let you guys know that if you have questions, if you want to challenge Brad or Josh or Jeff you can come up to mic and ask your questions as well. Jeff, what’s your response?

Jeff Madrick: I just think I seriously disagree with Brad on this issue. Not that Obama prematurely withdrew. In my own writings, I was arguing about that all the time. Christina wrote a very good essay, I wrote about it many times about multipliers over one, it was an excellent piece of work but the fact is a large proportion of the economics community battle that idea. Many supported the first Obama stimulus. I haven’t seen evidence about whether they would’ve supported a second Obama stimulus or still bigger one after that which I think we both agree would’ve been desirable.

I think Brad’s talking about an ideal wish list that economists for the most part are not talking about. There’s enormous pressure not to increase healthcare spending but to control Medicare and Medicaid spending and so forth. There’s enormous pressure not to invest in R&D. Let me name names of the major mainstream economists. There’s an extraordinary assumption that government R&D was not the significant or even the most significant factor in technology advance in America even the Post-World War II period. I love Bob Gordon, but he gave a talk about how the stagnation of technology and then somebody asked him questions about future technology. He said, “Well, that’s been through private capital not government. That’s not government.” Well, that ain’t so. It’s been government all the major venture capital has got into areas where government has been the leading investor.

I think Brad gave a beautiful wish list, but it’s a wish list. There’s a lot of decent stuff. I mean in my own defense, regarding Arrow and so forth, I would never say that Arrow defends market optimality. I think he spends his whole career showing how the extreme assumptions may had make it highly unlikely.

Ylan Mui: Any questions from the audience?

While we wait for someone to be brave enough to ask the first question I have another one for you Jeff, which is: You said that part of the reason you wrote the book because you don’t want us to repeat the mistakes of the past. To what extent do you think that mainstream economics has incorporated lessons from the financial crisis and is shifting? When we talk about unemployment now as the problem, not inflation, the IMF has spoken many times about the need for infrastructure investment et cetera. So are you seeing some of these ideas start to shift?

Jeff Madrick: Yeah, I’m seeing some of it start to shift. Brad brought this up also. I mentioned very explicitly that Olivier Blanchard changed his mind. But after you get wounded you begin to believe in God. He got wounded. He now believes in God. Thank goodness. He did and then a guy named Daniel Leigh, I did a little conference on this long before Blanchard sponsored the research with Daniel Leigh on demand and growth. It was hard to get that stuff out there. And who is knocking heads together? Alesina of Harvard, not the Chicago guys but Alesina…

Brad DeLong: He was born in Italy, and has the Italian’s view of the effectiveness of government having watched the Christian Democratic party run Southern Italy like feudalism for forty years.

Jeff Madrick: Well in any case, Alesina was knocking heads together proposing that austerity works and it was…

Brad DeLong: But he was the only one of the 40 people on the Chicago Business School panel of expert economists, right? Nobody else agrees with him, right?

Jeff Madrick: But he had the year of George Osborne. 20 LSE economists wrote in favour of the Osborne budget. They were all–it’s not as if the Germans don’t have the school of thought, it is, we think, a perverse school of thought, but they have an economic school of thought. They don’t represent the mainstream here so much, obviously. My point is there’s has been a lot of economic influence in the wrong direction and I fear I’m not answering your question. [Laughter]

Ylan Mui: Josh, Josh, what are your thoughts here? I mean do you feel like there’s been a shift in mainstream thinking?

Josh Bivens: It’s pretty early to tell. I mean let me step back. I think, again, this discussion is about where does the breakdown happen between in the policymaking process. Why do we get so many bad policy outcomes> Is the problem economist who generated that the front-end of the chain? Or do they somehow get messed up along the way, and it’s the policy makers on the ground who garble the ideas and get it wrong? And I think there’s blame to go around for sure.

In Jeff’s book I think it’s mostly about that top of the food chain where the ideas come from. I will say I think Brad does have some points in that. We’ve got a lot of economists saying some sensible things, and yet we’re doing almost nothing sensible these days in economics. And so I would like as much attention as Jeff has put in his book on how to make sure economists have better ideas–and this is really self-serving because I work in a policy institute–but I think we need a lot more attention and resources aimed at places to figure out how to make that translation so that the good ideas in economics actually make it unscathed through the policymaking process.

I see lots of people who want to throw a lot of money to change how economists think and that’s worthy goal. But there’s also this other really important channel that doesn’t get enough attention: How to make sure that the good ideas that the economists have find good shepherds in the policymaking process. I have to argue EPI is a pretty good shepherd of such things and there’s lots of…

Ylan Mui: So you’re saying the problems aren’t diversity of thought it’s transmission of thought.

Josh Bivens: It’s not the only problem. Transmission is a problem.

Brad DeLong: The Council on Foreign Relations can put on absolutely the worst conference on the macroeconomy back in March 2009. Even at retrospect I can only marvel at the total incompetence and irrelevance of the people chosen to speak. In fact, as long as I live, at the end of March I am going to make it part of April Fool’s Day on my weblog to make fun of them.

Ylan Mui: Questions…

Brad DeLong: EPI has a hard time getting stuff out…

Ylan Mui: A question from the audience.

Audience 1: Yes. May be Josh’s comments were particularly good. I think to set up the question that I had and that is on a question of currency manipulation. Of course I’m operating under the disadvantage for not having read your book. You mentioned that you have a chapter on globalization. My view and I think that the institute is confusing itself with the importance of if there’s one thing that one could try to change to help setup a better international economic system would be counteract currency manipulation but we don’t see this.

Just a few weeks ago yet again the Treasury Department says no currency manipulation. The question I have for our guest, for you Jeff is to what extent–maybe you can help us unpack this, to what extent is that an economic question, let’s say from a point of view of some economists, is it a–to what extent is it a question of that it’s sort of that not getting into that area is something that business people whose business model depends on not dealing with that issue? How do they perpetuate this? What about the politics at this, the hill politics, all of that?

Maybe we could get to Josh’s question in that particular area. How do we move from this stagnation and obviously outdated policies to something better?

Jeff Madrick: It was directed at me and I guess everybody will speak on that. Obviously, currency manipulation is a major political issue. It’s a very old free trade issue. We do one thing and they retaliate with some other policy that under minds what we do. I would like to see a different evaluation for the dollar. I would like to see them stop doing that. Partly they started manipulating the currency when they joined the WTO because they were forbidden from doing some other things that help their exports.

So I think it’s—one of the major problems we face is the fact I did a little piece where I included this, in New York Times, a worldwide agreement on how to set exchange rate policy.

Now we, long time ago in the 1970s, decided we just let the market decide. And here I’m probably—they’re two issues of course. You can manipulate the market but also specially with the dollar, the dollar price is trying to settle two different kinds of markets who reserve currency market and the trade market so it seems implausible to me that one price would solve both problems but I don’t have the easy answer for that but I do think some economist, Peter Tanman for example are talking about having there is a priority in dealing with the balancing of trade deficits and trade surpluses in the world. It can’t be forever that the only grow—reasonable growth model is export growth.

But by and large historically, export growth has been the launching pad for most economists so you raised probably the most difficult question for which there is only not an easy answer.

Ylan Mui: Josh?

Josh Bivens: I really agree with that question. Of all the policy debates, in terms of starting from some kind of consensus among economist, I don’t really think it exists on that issue so much. And then there are all of the barriers to getting anything like a consensus expressed in policy. There are administration officials who will say: we have a lot of things to worry about our relationship with China and a lot of this sort of currency managing countries, and why does this one go to number one? I’m definitely of the mind that if we can convince these countries to stop ploughing tons of money into our economy rather than their own that would be a really good thing for both countries in the long run. But one has a lot of hurdles going from consensus through the policy making. So that one I think is the hardest to generate what exactly the breakdown is.

Other ones are a little easier: like why our congress people who have no say over monetary policy have been hearings for the scream at Federal officials. They think they have a stake in a not-very-good economy for the time being. I mean I think it’s pretty much simply that crude.

Brad DeLong: You don’t think they’ve been listening to the wrong people–having dinner with Cliff Asness and John Cochrane?

Josh Bivens: I don’t think they believe—-I think those people will tell them something entirely different if all of a sudden Republicans were seen as in charge of the economy and responsible for bad economic outcomes.

Brad DeLong: I don’t think Asnes and Cochrane would.

Josh Bivens: Naah, okay. But they would stop talking to them.

Brad DeLong: And they would be having dinner with Greg Mankiw instead?

Josh Bivens: Yeah…

Brad Delong: Right…

Ylan Mui: Larry Mishel

Larry Mishel: Thanks. I think it is interesting to think about the problems at two points of the food chain. One is where the economists are a weakness. The other is then what happens even beyond that.
Just getting to the whole issue of the Great Recession and the inadequate response which shapes this debate, one of the things that surprised me so much–I was a little shocked about the complete rout of Keynesian economics in the academy. There was very little–there’s a group, but outside of Berkeley and some people at Princeton and whatever, it was a pretty thin group to support the idea of an active fiscal policy. We also have to think about, even given that, why was there the bad turn in the Obama administration? The giving-up of the stimulus, and part of it is that the whole idea stimulus was defeated in the public marketplace ,in part because there was this stimulus and the unemployment rate didn’t seem to get to where people wanted it to be.

Jeff Madrick: Or was promised.

Larry Mishel: It was promised–well, that was a mistake, but part of that is that we just had a really, really, really deep recession and has really hard to do almost everything that you could to get the unemployment rate back to full employment within a year or two. It’s just not going to happen.

Brad DeLong: Well, if your problem is a disruption of the housing finance credit channel, actually doing something to fix the housing finance credit channel might help.

Audience 2: I’m very sympathetic to the fact that there has been a major defeat in the academic world for activist fiscal policy. That was pretty clear. It’s not all of our problems. I guess it’d be useful to think about what are the range of problems that we are confronted with, even if you were to get to the point where academia is correct. Part of it is that we are not talking about the incredible power of money in politics and policy, and the role of Wall Street in both the democratic party and in the Republican party.

Maybe we should comment a little bit about that.

Brad DeLong: As I said, I see economists somewhat differently. I see 38 of 40 of the Chicago Business School Panel’s contributors saying: yes, expansionary fiscal policy does produce benefits. Even though we are only, I think, at 32 out of 40 saying the stimulus was a good cots-benefit idea–the other seven plus Alberto Alesina saying that the debt was already too high for the benefits to be worth it.

The rout in the academy was—-if it was there–extremely short-lived. It was tied to a momentary boomlet behind Giavazzi-Alesina ideas of expansionary austerity because it would somehow summon the Confidence Fairy. It was coupled with the very smart Ken Rogoff and Carmen Reinhart’s greatly overselling their evidence about the potential risks run by running up high national debt due to (a) an analytical mistake in terms of choosing the wrong baskets into which to sort their data, and (b) failing to properly distinguished between sovereigns that have exorbitant privilege in that they issue reserve currencies and sovereigns that do not.

It looks to me like it’s recovered to pretty much where it was back in 2007.

Jeff Madrick: You knowm what I was always struck by the Christina Romer essay ,in which she did empirical work or some rise empirical work on whether there’s a multiple, and she said specifically like she’s just defending herself, “I am not a Keynesian. I am simply an empiricist.”

Now that to me suggested something. That to me suggested something’s going on in academia that being labelled a Keynesian made you something: being a Keynesian made you something of a pariah. I think that’s probably still the case of most of the empirical argument. But we’re not talking about a simple yes or no on the Obama stimulus. Most people say yes. Mark Zandi’s model said yes, and he’s by and large a Republican.

We’re talking about do we continue with the stimulus? Do we stop worrying about the deficit, on which there is so much pressure coming from the economics community I believe. It’s not a simple short term issue. I think the economics community thinks of it as so. I do think Larry’s right. I think the Keynesian argument was by enlarged routed. It’s still an embarrassment in some circles still call yourself a Keynesian, and that has to have an impact.

And we should talk a little bit about EPI–one of EPI’s major issues which is what cause inequality. Do we really—and is there really economic—a correct economic consensus about that? I don’t know if he wants to talk about that. Larry doesn’t want to talk about that.

Larry Mishel: That’s actually my question.

Ylan Mui: Josh, do you have a point—a point you want to add? What do you want to say to your boss?

Josh Bivens: We have a whole project on what calls the equality called Raising Americas Pay. You should check it out on our website. I mean I would say yeah, I think it’s an illustration I think of Jeff’s chapter one. For way too long the conventional wisdom was that labor is just like a commodity. There is supply and the demand for it, so if inequality rises something must’ve shifted those supply and demand curves. People go on about the race between education and technology. The work of Larry specially over the years has shown just not a lot of evidence that education or the increase in technology has been the big driver of inequality. Economists need to broaden out and actually look at the policy changes we’ve under taken over the past couple of decades that have intentionally shifted bargaining power from low and moderate wage workers to corporate managers and owners.

I think one thing that keeps economist from looking there is that I don’t think their policy patrons are all that interested in looking too hard there. I also do think there’s a class bias among our economist.

I mean look at the Chicago survey that Brad’s been talking about. They survey 40 economists of the Chicago Business School. They asked them basically a question, “Do you like Uber?” and the idea that they love Uber. They love the idea shaking up monopolies when the people are going to be hurt by that are taxi drivers. They asked them: do you think the US software patent system is doing well? Most of them said–a third well, a third badly, a third I don’t know.

Brad: Somebody thinks software patents are doing well?

Josh Bivens: Because there are some really rich people making money off software patents. They’re a lot harder to kick than taxi drivers. And so I really do think when it comes to applying the simplistic theory of chapter one of Jeff’s book. It matters a lot….

Brad DeLong: And I have an email from a student saying:

I think the evidence is that while there are a lot of good ideas in intellectual scaffolding of economics, the Friedmanite socialization of economist is one that makes them (a) epistemologically blindfolded by naïve positivism which leads them to believe technocrats that believe themselves above the fray of democratic politics, (b) too willing to believe the great glass bead game of model building and finding natural experiments, (c) too inclined to treat the decisions of capitalists as forces of nature rather than sociological constructions, and (d) too slavish to finance in business schools.

Jeff Madrick: Berkeley is a good school.

Ylan Mui: We have our last question.

Audience 3: I would like to follow up the issue of inequality. Jeff, when you opened your remarks you talked about the difference between inequality in opportunity and inequality in outcomes. Josh just talked about how the foundations of inequality and growth have shifted over the years that it’s no longer a strict trade off. The research is showing that inequality can actually lead to lower growth rather than higher growth.

We just had the Boston Fed meeting where inequality of outcome was shown to affact inequality opportunity. Ifs you don’t have equality of outcomes you don’t get to the inequal—you don’t get to the equality of opportunity. This morning, one of your other organizations here in town, the American Enterprise Institute just blasted Janet Yellen for mentioning the fact that inequality of outcome might be important, basically called her a leftist politician. Parti—excuse me, a partisan leftist politician. Do you see any hope here?

Jeff Madrick: Thank you for asking that. This is another area in which from my point of view mainstream economists have by and large failed, with exceptions. By and large they say inequality of outcomes is not our interest. William Buiter now at Citicorp would say that. Bernanke said it–that inequality of distribution is not really our issue. Yellen grabbed so much attention is because it’s not stated by somebody in Yellen’s position and it’s about time it should be stated. It is not—nothing quite peace me as much and it comes from the left and the right.

The answer to all our problems is education. Just get kids, make it cheaper to go to college. We have so much deeper problem than education. It’s not at all obvious that education and skills attainment are identities, but the economics profession does regression analyses as if attainment level of schooling is exactly equal to skills identity. The OECD did a comprehensive study and found that skills are considerably higher in Europe at the same level of education compared to the level of education in the US. That doesn’t stop economists from doing these regression analyses. It’s an area for me of misinformation. There is nothing easy. It’s apple pie and motherhood. What’s wrong with you? I have some apple pie, go home and see your mom.

Educate people. It is so much more difficult a problem–while there are lots of exceptions, Heckman for example, talks a lot about early childhood education. We need interventions, we now realize, at zero. We need serious public investment. Not just public investment that meets a rather tech—narrow technical definition of what public is. We know that there’s neurological damage for kids from zero to three, neurological damage not only from being hit in the head but just from neglect. There are major issues here to face and we’re just not doing it. We are suppressing this, with the help of some economists.

I think many economists are suppressing social spending in America. It’s haunting us already. It’s going to continue to haunt us. People talk about secular stagnation. If this is true, why would you be surprised? Our infrastructure stinks, our education system stinks, we have the highest child poverty rate in the world, 25 to 30 per cent of kids under five or six are by and large lost to the system. That’s a huge chunk of the population. Why should we have a glorious future?

Economists should be asking themselves whether they should devote themselves to that or more—-let me be kinder about this, more fully. [Laughter]

Brad DeLong: The interesting thing is that if you actually will listen Janet Yellen’s speech. It wasn’t the partisan speech. It wasn’t the political speech. It was very much the standard just-the-facts manner that Janet has adopted since the Clinton administration picked her for her first go-round at the Fed in 1994. Here are the important facts about this situation. You analyse them as you like. I think it speaks a great deal about the American Enterprise Institute as an institution that it now thinks that learning about facts and trying to analyse them is itself a leftist partisan political thing.

Is it John Stewart or was it Stephen Colbert who says the problem is that reality has a liberal bias. I think the only way to read the AEI attack on what’s very weak tea is as confirming that that, indeed, seems to be the case in America today. That makes me a lot less certain that if the Republicans were in power that people who still retain some anchor to reality would have positions of influence.

Jeff Madrick: In agreement with Brad, Janet Yellen’s strength is that she does stick to the facts. Now, humans are imperfect beings. Bias will always enter somehow. But by and large she’s going to succeed, and the reason is–to say she does her homework is an understatement. So I always worry about the old boys club. My guess is Obama worried about it when he seemed to be resisting Yellen’s appointment. She fights it by being by and large the best or at least the best informed economist in and among her peers in decision making capacity.

Ylan Mui: And Jeff we’ll let you have the last word here. Thank you so much to you for being here. The book is Seven Bad Ideas. I think it’s going to be for sale outside this room. Thank you to Josh and to Brad for joining us as well…

---

7619 words

Must- and Shall-Reads:

• Matthew C Klein: Why didn’t QE3 raise inflation expectations?
• Matt Bruenig: What Tax Puzzles Tells Us About Economic Justice

 

1. Simon Wren-Lewis: Fighting the Last War: “Why are helicopter drops taboo in policy circles? Why is it illegal in the Eurozone? The answer is a fear that if you allow governments access to the printing presses, high inflation will surely follow at some point. Many of those who worry about helicopter money are fairly relaxed about Quantitative Easing (QE), which involves much more money creation than would be involved in a helicopter drop…. The key reason they are more relaxed is that central banks are in control of QE, whereas governments would initiate money financing of deficits…. I think it is possible to take two quite different views…. The first is that, in most OECD economies today where macroeconomic understanding is better and information more available, inflation targets are more than sufficient to prevent us experiencing the inflation rates of the 1970s again…. A second view is that we have the story of the 1960s and 1970s all wrong. We did not get high inflation in advanced economies because governments wanted to monetise their own profligacy… [but] because of the combination of a number of specific factors: trade union pressure in the face of shocks that tended to reduce real wages, underestimation of the natural rate (and a poor understanding of how monetary policy should work), and placing too great a priority on achieving full employment. The latter might have been a legacy of the 1930s: policymakers were also fighting the last war…. I think both views are probably correct. As a result, I’m much more relaxed about money financing of deficits in the current situation…. However, irrational fear of rising debt in a recession has similar characteristics to fighting the last war: deficit bias is a problem, but a recession is not the time to worry about it. I think this is why I am not persuaded by this article by Ken Rogoff: yes, in the grand scheme of things we should worry about inflation and debt, but right now we are worrying about them too much and therefore failing to deal with more pressing concerns.”

2. Matthew Yglesias: A Fed insider explains why the central bank is making a big mistake: “Narayana Kocherlakota, President of the Minneapolis Federal Reserve Bank, put out a statement this weekend explaining why he thinks his colleagues made a mistake by bringing an end to Quantitative Easing. He would prefer they emulate Japan by continuing to print money until inflation gets up to 2 percent…. ‘In my assessment, the medium-term outlook for inflation has shown no overall improvement since last December and, indeed, is arguably worse. Failing to act in response to this subdued inflation outlook increases the downside risk to the credibility of our 2 percent inflation target. Market-based measures of longer-term inflation expectations have fallen recently to unusually low levels, a decline that I believe reflects that kind of increased downside risk…. Of course, there are costs and benefits to every monetary policy action and inaction, and assessing those costs and benefits is by no means straightforward. On this occasion, my assessment differed from that of my colleagues. Such occasional differences in perspectives are, I think, hardly surprising given the complicated nature of the decision problem that we face. But those differences should not obscure the collective commitment that my FOMC colleagues and I all share to the dual mandate objectives of price stability and maximum employment that Congress has established for the Committee. I look forward to working with my colleagues in future meetings, under Chair Yellen’s leadership, to achieve those objectives.'”

3. George Dvorsky: How Universal Basic Income Will Save Us From the Robot Uprising: “Looking ahead to the future, we may have little choice but to implement it. Given the ever-increasing concentration of wealth and the frightening prospect of technological unemployment, it will be required to prevent complete social and economic collapse…. The idea has also been supported by the esteemed economists Friedrich Hayek and Milton Friedman, the latter of whom advocated for a minimum guaranteed income via a ‘negative income tax’…. Some thinkers contend that broader social restructuring will have to accompany the problems wrought by technological unemployment…. Gary Marchant, Yvonne Angelica, and James Hennessy present six possible policy options: Protecting Employment…. Sharing Work…. Making New Work…. Redistribution…. Education…. Fostering a New Social Contract…”

4. Duncan Black: Never Mind Then): “Philadelphia is a ‘school reformers’ paradise…. All of the predictable things have come to pass. Much corruption in the charter schools. Money siphoned off from the actual public schools. Constant turmoil for students as schools (both charter and public) close, either by fiat or because they collapse. No evidence that educational performance has improved (the opposite). And the solution will be more of the same until the whole thing collapses and what money is left just goes into the hands of the grifters. Because we love our children.”

5. Lisa J. Dettling and Joanne W. Hsu: Returning to the Nest: Debt and Parental Co-residence Among Young Adults: “We estimate the relationship between current period debt and subsequent decisions to co-reside with a parent. Our results indicate that indebtedness – as measured by average loan balances, declining credit scores and delinquency on accounts – increases flows into parental co-residence. Moreover, after moving in, delinquency and low credit scores increase time spent in co-residence. We find that the changing debt portfolios of young adults over this period – characterized by rising student loan debt and small declines in credit card, auto and mortgage debt – can predict 30 percent of the observed increase in flows into co-residence, and 26 percent of the observed increase in time spent in co-residence.”

Should Be Aware of:

• Chris Hayes: The New Abolitionism
• What To Do If Trolls Have Doxx’d You With A #trollattack (with images, tweets) · adriarichards · Storify
• John Paul Titlow: This Man Uses Twitter To Augment His Damaged Memory ⚙ Co.Labs ⚙ code + community
• Scott Lemieux: The Pernicious Myth of the Moderate Republican
• Owen Zidar: A few useful job market resources

 

1. Norman Ornstein: When Conspiracy Theories Don’t Fit the Media Narrative – The Atlantic: “For those interested enough in the 2014 elections to read stories about them in the premier newspapers of our time, The Washington Post and The New York Times, you would know about the bios of Ernst and Cotton, two prize GOP recruits this election cycle. But you would be likely clueless about the wacky or extreme things they have said…. A Nexis search shows that the Post has had four references to Ernst and Agenda 21—all by Greg Sargent on his blog from the left, The Plum Line, and none on the news pages of the paper. But there have been dozens of references to Braley’s spat over the neighbor’s chickens, including a front-page story. The New York Times had zero references to Ernst and Agenda 21, but seven, including in a Gail Collins column, to Braley and chickens. The Post did have a fact-check column by Glenn Kessler devoted to the Cotton claims on Mexican drug lords and ISIS terrorists—Cotton did not fare well—but no news stories. The Times did not mention it at all…. What it suggests is how deeply the eagerness to pick a narrative and stick with it, and to resist stories that contradict the narrative, is embedded in the culture of campaign journalism. The alternative theory, that the Republican establishment won by surrendering its ground to its more ideologically extreme faction, picking candidates who are folksy and have great resumes but whose issue stances are much the same as their radical Tea Party rivals, goes mostly ignored…. [There are] no stories saying that references to Agenda 21 or talking about terrorists and drug lords out to kill Arkansans were disqualifying…. It’s not a very good way for readers to figure out how the people they vote for might actually behave in the Senate. And that’s not very good news for voters or the political process.”

Simon Wren-Lewis: Fighting the Last War: “Why are helicopter drops taboo in policy circles?…

…Why is it illegal in the Eurozone? The answer is a fear that if you allow governments access to the printing presses, high inflation will surely follow at some point. Many of those who worry about helicopter money are fairly relaxed about Quantitative Easing (QE), which involves much more money creation than would be involved in a helicopter drop…. The key reason they are more relaxed is that central banks are in control of QE, whereas governments would initiate money financing of deficits…. I think it is possible to take two quite different views…. The first is that, in most OECD economies today where macroeconomic understanding is better and information more available, inflation targets are more than sufficient to prevent us experiencing the inflation rates of the 1970s again….

A second view is that we have the story of the 1960s and 1970s all wrong. We did not get high inflation in advanced economies because governments wanted to monetise their own profligacy… [but] because of the combination of a number of specific factors: trade union pressure in the face of shocks that tended to reduce real wages, underestimation of the natural rate (and a poor understanding of how monetary policy should work), and placing too great a priority on achieving full employment. The latter might have been a legacy of the 1930s: policymakers were also fighting the last war…. I think both views are probably correct. As a result, I’m much more relaxed about money financing of deficits in the current situation…. However, irrational fear of rising debt in a recession has similar characteristics to fighting the last war: deficit bias is a problem, but a recession is not the time to worry about it. I think this is why I am not persuaded by this article by Ken Rogoff: yes, in the grand scheme of things we should worry about inflation and debt, but right now we are worrying about them too much and therefore failing to deal with more pressing concerns.

Matthew Yglesias: A Fed insider explains why the central bank is making a big mistake: “Narayana Kocherlakota, President of the Minneapolis Federal Reserve Bank…

…put out a statement this weekend explaining why he thinks his colleagues made a mistake by bringing an end to Quantitative Easing. He would prefer they emulate Japan by continuing to print money until inflation gets up to 2 percent….

In my assessment, the medium-term outlook for inflation has shown no overall improvement since last December and, indeed, is arguably worse. Failing to act in response to this subdued inflation outlook increases the downside risk to the credibility of our 2 percent inflation target. Market-based measures of longer-term inflation expectations have fallen recently to unusually low levels, a decline that I believe reflects that kind of increased downside risk…. Of course, there are costs and benefits to every monetary policy action and inaction, and assessing those costs and benefits is by no means straightforward. On this occasion, my assessment differed from that of my colleagues. Such occasional differences in perspectives are, I think, hardly surprising given the complicated nature of the decision problem that we face. But those differences should not obscure the collective commitment that my FOMC colleagues and I all share to the dual mandate objectives of price stability and maximum employment that Congress has established for the Committee. I look forward to working with my colleagues in future meetings, under Chair Yellen’s leadership, to achieve those objectives.

George Dvorsky: How Universal Basic Income Will Save Us From the Robot Uprising: “Looking ahead to the future…

…we may have little choice but to implement it. Given the ever-increasing concentration of wealth and the frightening prospect of technological unemployment, it will be required to prevent complete social and economic collapse…. The idea has also been supported by the esteemed economists Friedrich Hayek and Milton Friedman, the latter of whom advocated for a minimum guaranteed income via a ‘negative income tax’…. Some thinkers contend that broader social restructuring will have to accompany the problems wrought by technological unemployment…. Gary Marchant, Yvonne Angelica, and James Hennessy present six possible policy options: Protecting Employment…. Sharing Work…. Making New Work…. Redistribution…. Education…. Fostering a New Social Contract…

Me? The fact that we experienced “peak horse”–that all of a sudden there was nothing the marginal horse could do that paid for its maintenance, and that as a result the horse population downsized massively–makes me very skeptical of claims that there will always be productive, profitable, and paid things for the marginal human to do. As I say over and over again, break it down: (1) backs, (2) fingers, (3) brains-as-cybernetic-control mechanisms (both white-collar and blue-collar), (4) smiles, (5) mouths-to-communicate, and (6) minds to think.

In past generations predictions of technological unemployment have been false because the decline in (1) and (2) has been offset by growing demand from a richer society for (4), complementarity between machines and (3), and the failure of communication to become one-to-many fast enough to reduce relative employment in (5). Of these, only (4) looks secure to me for the future. But will it be enough?

Must- and Shall-Reads:

• Mark Thoma: Economist’s View: Links for 11-01-14)
• Asymptotes: Asymptosis » How Do Households Build Wealth? Probably Not the Way You Think. Three Graphs

 

1. Jan Hatzius:: Goldman Disagrees With The Fed On Labor Market Slack: “We disagree with the [FOMC’s] view on labor market slack. While the unemployment rate is now below 6% and the explicit phrase in the FOMC statement that ‘…underutilization of labor resources is gradually diminishing…’ is factually correct, the implicit notion that underutilization is no longer ‘significant’–the term used in the July and September statement–looks inconsistent with the employment and wage data…”

2. Cardiff Garcia: Affordable Housing and the Legit Big-City Whinge: “When city-dwellers moan about their high cost of living, they often elicit the unsympathetic retort that they should shut up and praise the ghost of Jane Jacobs for the cultural vibrancy of their neighborhoods, the lucrative jobs, and the artisanal pizza: ‘Living in a great city is a consumption good, you whinging ninnies — you SHOULD have to pay for it! Why do you think you’re entitled to live wherever you want?’ Hey, fair enough. But there’s a difference between grumblings about $5 cinnamon macchiatos and the more useful outrage about meaningful troubles that can be solved — a difference between #firstworldproblems and the healthier expression of annoyed patriotism towards one’s habitat: ‘I like living here and want to keep living here, which is why the problems I complain about aren’t enough to push me out. I’d rather stick around and see the problems solved. But those problems suck, so let’s start doing something about them.’ To complain that rents, for instance, could and should be lower isn’t always a sign of yuppie entitlement. Nor is it mutually exclusive with appreciating the wonderful aspects of city life. Sometimes the gripe really is legitimate…”

3. Jacob Schlesinger: The Kuroda Bazooka, Round Two: “Faced with fresh evidence that his bold campaign to end deflation was losing steam, Bank of Japan Gov. Haruhiko Kuroda Friday fired off a fresh round of ammunition from his famed money-spewing bazooka, shocking markets with a big increase in the central bank’s stimulus program. The impact was immediate, with the Nikkei Stock Average soaring more than 4% and the yen dropping sharply to a near-seven-year low against the dollar…. In sharp contrast to Mr. Kuroda’s first major easing announcement in April 2013, shortly after he took office, the central bank’s policy board was deeply split. Last year, he managed to get a 9-0 vote in favor of a policy that broke sharply with his more cautious predecessor. This time, the board voted 5 to 4…. Earlier in the day, the government had announced that the most closely watched gauge of inflation had fallen to 1% in September, having decelerated sharply from the 1.5% peak in April. That’s well below Mr. Kuroda’s 2% target, and showed the limited impact of the stimulus program to date…. Behind the surprise may also lie a broader strategy of economic policy coordination with the government. Before the BOJ announcement, Japanese stocks were up sharply in anticipation of an announcement planned for later in the day that the giant government pension fund would reallocate its portfolio…. And, looming for Mr. Abe is a decision on whether or not to go forward with a plan to raise the sales tax next year to 10% from the current 8%. It was the boost earlier this year… that slowed Japan’s economy and seemed to derail Mr. Kuroda’s earlier success in battling deflation. Mr. Kuroda has been a staunch and public advocate that Japan needs to go forward with the tax hike in order to curb its mammoth sovereign debt. Friday’s move, by providing at least a short-term dose of growth, will likely make it easier for Mr. Abe to take that step.”

4. Paul Krugman: Apologizing to Japan: “For almost two decades, Japan has been held up as a cautionary tale, an object lesson on how not to run an advanced economy…. Western economists were scathing in their criticisms…. I was one of those critics; Ben Bernanke… was another. And these days, I often find myself thinking that we ought to apologize…. Our economic analysis… look[s] more relevant than ever now that much of the West has fallen into a prolonged slump very similar to Japan’s experience…. In the 1990s, we assumed that if the United States or Western Europe found themselves facing anything like Japan’s problems, we would respond much more effectively than the Japanese had. But we didn’t, even though we had Japan’s experience to guide us…. Start with government spending. Everyone knows that in the early 1990s Japan tried to boost its economy with a surge in public investment; it’s less well-known that public investment fell rapidly after 1996 even as the government raised taxes, undermining progress toward recovery. This was a big mistake, but it pales by comparison with Europe’s hugely destructive austerity policies, or the collapse in infrastructure spending in the United States after 2010…. Or consider monetary policy. The Bank of Japan, Japan’s equivalent of the Federal Reserve, has received a lot of criticism…. That criticism is fair, but Japan’s central bank never did anything as wrongheaded as the European Central Bank’s decision to raise rates in 2011…. And even that mistake is trivial compared with the awesomely wrongheaded behavior of the Riksbank…. As for why the West has done even worse than Japan, I suspect that it’s about the deep divisions within our societies. In America, conservatives[‘]… general hostility to… a government that does anything to help Those People. In Europe… the German public is intensely hostile to anything that could be called a bailout of southern Europe…. Japan used to be a cautionary tale, but… [now] it almost looks like a role model…”

5. Anatole Kaletsky: The takeaway from six years of economic troubles? Keynes was right: “The policy experiments… since… 2008 crisis. The main lesson is that government decisions on taxes and public spending have turned out to be more important… than the monetary experiments…. Fiscal policies have been very different and the divergence in outcomes… has been exactly the opposite to what was implied by the rhetoric of most politicians and central banks. Countries that took emergency measures to reduce public borrowing have mostly suffered weaker growth…. The six years since 2008 have provided strong empirical support for the supposedly outmoded Keynesian view that government borrowing is more powerful than monetary policy in stimulating severely depressed economies and pulling them out of recession…. The underlying reason… is a matter of simple arithmetic… should not be open to debate…. [With] ‘deleveraging’… in the private sector… arithmetic shows that economic balance can only be restored if some other sector of the economy spends more than its income…. Monetarism… assum[ed]… interest rates could always be reduced sufficiently to stimulate private investment, discourage private savings…. In the era of high inflation when monetarism was introduced, the idea… was reasonable enough…. Ironically… the very success of monetarism and central banking in conquering inflation now means that the era of monetary dominance is over…. With interest rates at or near zero, private demand cannot be simulated with further rate cuts and this means that monetary easing can no longer offset fiscal tightening…. Conversely, fiscal expansion now provides an unqualified economic stimulus because there is no risk of interest rates rising significantly… perhaps not until the end of the decade…”

6. Linda Greenhouse: The Roberts Court’s “Greatest Threat to Public Confidence”: “Late on a Friday night earlier this month, the Supreme Court voted in another case from Texas to permit the state’s voter ID law, the strictest in the country, to take effect… prevent as many as 600,000 Texans, 4.5 percent of all those registered, from voting next month. The impact, Judge Nelva Gonzales Ramos found, would fall disproportionately on black and Latino Texans. She ruled that the law violated Section 2 of the Voting Rights Act of 1965…. The six justices who let the stay remain in effect didn’t bother to explain themselves beyond the word ‘denied.’ That left it to Justice Ruth Bader Ginsburg and two others, Justices Sonia Sotomayor and Elena Kagan, to explain in dissent what was wrong with that outcome…. ‘The greatest threat to public confidence in elections in this case,’ Justice Ginsburg said, ‘is the prospect of enforcing a purposefully discriminatory law, one that likely imposes an unconstitutional poll tax and risks denying the right to vote to hundreds of thousands of eligible voters.’ A law, in other words, that in the full glare of publicity and on the verge of a highly polarized election, threatens destruction to the social fabric in the most dangerous way, by shutting thousands of citizens out of the democratic process of choosing their leaders. ‘There is no right more basic in our democracy than the right to participate in electing our political leaders,’ Chief Justice John G. Roberts Jr. wrote for the court in April of this year. His subject then was the right to spend money in politics, not the right to vote. If people conclude that the current Supreme Court majority cares more about the first than the second–surely a logical inference–the court will have entered a dangerous place. And so–as a conservative justice once realized in another context–will the country.”

7. 
   Matt O’Brien: This is why the economy has fallen and it can’t get up: “The chart… shows how much more pessimistic the Congressional Budget Office (CBO) has become about the economy, revising its estimate of potential economic down in each of the last seven years…. This is scary stuff…. If it’s right, it means that the Great Recession has made us permanently poorer…. But why hasn’t this big crash been followed by a big comeback? Well, like everything else in economics, it comes down to two things: supply and demand. Larry Summers, who put this chart together, points out that the economy has needed lower and lower interest rates just to get enough investment to create jobs for everyone who wants one…. Not only that, but this ‘secular stagnation’ could turn deficient demand into deficient supply, too. It’s what economists call hysteresis, and the idea is that a long slump can hurt the economy’s productive capacity…. The economy can’t recover on its own, and if it doesn’t soon it might never be able to. We need more inflation, more infrastructure spending, and less tut-tutting about the deficit that… isn’t an urgent problem….”

8. William Dupor and Peter B. McCrory: Fiscal Policy Spillovers: Points of Employment to Places of Residence: “Using cross-county Census Journey to Work commuting data, we cluster U.S. counties into local labor markets, each of which we further partition into two subregions. We then compare differential labor market outcomes and Recovery Act spending at the regional and subregional levels using instrumental variables. Among pairs of subregions, we find evidence of fiscal policy spillovers. For example, $1 of Recovery Act spending in a large subregion increases its own wage bill by $0.79 and increases the wage bill in its neighboring subregion by $0.59. We find similar spillover effects when we replace the wage bill with employment as our measure of economic activity. Next, we build a dynamic equilibrium trade model with interregional commuting capable of propagating these spillovers across regions.”

Should Be Aware of:

• Arthur Chu: I’m not “that creepy guy from the Internet”: How Gamergate gave the geek community a bad name – Salon.com
• Kash Mansouri: Transfer Pricing Economics | News and analysis from the arcane world of transfer pricing.
• Rex Nutting: As you head to the polls, remember who wrecked the economy
• David Roberts: Is this House Republican about to lose to a climate hawk?

 

1. Nick Rowe: “There’s a Second Macroeconomic Fallacy…. ‘If you want higher interest rates then the central bank should just set a higher interest rate, duh!’… We saw this fallacy at work in Sweden recently. The Riksbank wanted higher interest rates, to reduce the dangers of financial instability, so it set a higher interest rate. But the only result was that the Riksbank needed to set an even lower interest rate a little while later. Lars Svensson understood the Interest Rate Fallacy, but then ordinary people are not Lars Svensson…”

2. Jamelle Bouie: Mississippi, the Affordable Care Act, and racism: The state’s failures are rooted in its violent and racist history: “Driven by its high poverty rate, Mississippi ranks low on health and wellness. It has one the highest rates of obesity, heart disease, and diabetes in the country, as well as the highest mortality rate for infants and adults. These ills are worst among its black residents: 43.2 percent of Mississippi blacks are afflicted by obesity and its associated problems and 44 percent live at or below the poverty line, compared with a—still high—30.2 percent obesity rate and 16 percent poverty rate for whites. Which is to say that, more than anywhere else, the Affordable Care Act is necessary in Mississippi. But, as Sarah Varney describes in a vital piece for Politico Magazine, the state’s Tea Party–tinged Republican leadership—including Gov. Phil Bryant—refuses to budge. Not only did it shutter a state-run private exchange for individuals to purchase health insurance, it refused the Medicaid expansion, which would have extended coverage to those living in desperate poverty. The latter consequence is especially destructive…. Mississippi has poor social outcomes and a threadbare safety net. It also has—and has long had—the largest black population in the country. And it’s where slavery was very lucrative, and Jim Crow most vicious. This is not a coincidence. In Mississippi—as in the rest of the South—white supremacy brought a politics of racist antagonism…. Where they existed, public services were sparse and utterly segregated. Anything public had to be kept separate from blacks, or degraded, if that wasn’t possible. To get a sense of the scale of white resistance in Mississippi, consider this: During the civil rights movement, white supremacists built a network of state and private agencies to wreak havoc on black activists with surveillance, economic reprisals, and extreme violence…. More than a half-century later, and all of this is dead. But the ideas and culture it built are not. And why would they be? For nearly a 100 years, Mississippi was a white supremacist police state. Of course this made a mark on its culture. Of course these ideas of exclusion—and specifically, of racial hostility to outside interference and public goods—are still embedded in the structure of its politics…”

3. Aleksi Aaltonen and Stephan Seiler: The value of open content production: “Many organisations are developing open platforms to create, store, and share knowledge. This column analyses editing data by Wikipedia users to show how content creation by individuals generates significant ‘spillover’ benefits, encouraging others to contribute to the collective process of knowledge production.”

Jan Hatzius:: Goldman Disagrees With The Fed On Labor Market Slack: “We disagree with the [FOMC’s] view…

on labor market slack. While the unemployment rate is now below 6% and the explicit phrase in the FOMC statement that ‘…underutilization of labor resources is gradually diminishing…’ is factually correct, the implicit notion that underutilization is no longer ‘significant’–the term used in the July and September statement–looks inconsistent with the employment and wage data…

Anatole Kaletsky: The takeaway from six years of economic troubles? Keynes was right: “The policy experiments… since… 2008…

…The main lesson is that government decisions on taxes and public spending have turned out to be more important… than the monetary experiments…. Fiscal policies have been very different and the divergence in outcomes… has been exactly the opposite to what was implied by the rhetoric of most politicians and central banks. Countries that took emergency measures to reduce public borrowing have mostly suffered weaker growth…. The six years since 2008 have provided strong empirical support for the supposedly outmoded Keynesian view that government borrowing is more powerful than monetary policy in stimulating severely depressed economies and pulling them out of recession….

The underlying reason… is a matter of simple arithmetic… should not be open to debate…. [With] ‘deleveraging’… in the private sector… arithmetic shows that economic balance can only be restored if some other sector of the economy spends more than its income…. Monetarism… assum[ed]… interest rates could always be reduced sufficiently to stimulate private investment, discourage private savings…. In the era of high inflation when monetarism was introduced, the idea… was reasonable enough…. Ironically… the very success of monetarism and central banking in conquering inflation now means that the era of monetary dominance is over…. With interest rates at or near zero, private demand cannot be simulated with further rate cuts and this means that monetary easing can no longer offset fiscal tightening…. Conversely, fiscal expansion now provides an unqualified economic stimulus because there is no risk of interest rates rising significantly… perhaps not until the end of the decade…

Secular Stagnation

Princeps Cogitationis: If I am going to hold down my consulting and speech-making jobs, I need to understand what Larry Summers is talking about here:

Larry Summers: What to do about secular stagnation?

But it is too long! 3000 words! Help! What can I do?

Oeconomicarus: But I thought you read 300 books a year?

Princeps Cogitationis: I read the last chapter of 300 books a year. Then I read three short reviews of each. And then I opine fearlessly. Working through a difficult 3000-word argument and assessing it is not a good use of my time.

Oeconomicarus: So you want me to use my time enlightening you so that you can stamp your brand on my thoughts and make money off of them?

Princeps Cogitationis: Exactly!

Oeconomicarus: Were you not a literary figure of my rhetorical imagination, and did my Demiurge not have the opportunity to attempt to use twenty first-century communications technologies to leverage this dialogue across an audience global in scope, I would tell you to go where you deserve.

Princeps Cogitationis: But you won’t, will you?

**Oeconomicarus: No

Princeps Cogitationis: Well?

Knut Wicksell: You need to start by recognizing that financial markets powerfully influenced by central banks set the economy’s (safe) real interest rate; that when this market (safe) real interest rate is below the economy’s current “natural” interest rate we have (unexpected) inflation; that when this market (safe) real interest rate is above the economy’s current “natural” interest rate we have depression; and that when this market (safe) real interest rate is at the economy’s current “natural” interest rate we have prosperity (and stable inflation)…

Speculatoricus: And you need to start by recognizing that one factor that can raise the economy’s current (safe) “natural” interest rate is wild and enthusiastic financial overspeculation–but that such “bubbles” can do so only temporarily and unsustainably…

Accumulator: And you need to start by recognizing that no matter what it does the central bank cannot push the market (safe) real interest rate below -π, where π is the current rate of inflation. Because savers can always hoard goods or cash, the market nominal interest rate cannot fall below zero, which means the market (safe) real interest rate cannot be less than the rate of inflation.

Princeps Cogitationis: The four of you have lost me.

Oeconomicarus: (To Speculator, Accumulator, and Knut Wicksell) SHUT UP!! (to Princeps Cogitationis): The central bank controls the market interest rate, and needs to set it no higher than the economy’s natural interest rate to avoid depression. But when inflation is low, the natural interest rate may be so negative that even when the central bank pushes the market interest rate to zero it still doesn’t do the job! OK?

Princeps Cogitationis: OK. But what is this about bubbles and inflation?

Oeconomicarus: If the natural interest rate in terms of money is stuck at less than zero, a higher rate of inflation can raise it and bubble psychology can raise it–both make people less eager to hold cash and more eager to put their money to work, and so both raise the natural interest rate in terms of money, and then the central bank can do its job of avoiding depression.

Princeps Cogitationis: But?

Oeconomicarus: Bubbles are, by their nature, unsustainable–hence not a permanent solution–and disruptive. They are not a good answer to a situation in which the economy’s natural rate of interest is less than zero. Price stability–an inflation rate of 2%/year or less–is also a good thing to have: it makes business and other economic decisions more rational. Hence if at low inflation the non-bubble natural rate of interest in money terms gets stuck less than zero, we have a big macroeconomic problem. Larry Summers says that it is, and we do.

Princeps Cogitationis: So what is the way out?

Oeconomicarus: One way is a higher inflation target than our current 2%/year–or actually 1.75%/year–but Larry doesn’t like that for some reason. The second way is: “increased public investment, reduction in structural barriers to private investment… promot[ing] business confidence”. The third way is: “basic social protections so as to maintain spending power… reduc[ing] inequality… redistribut[ing] income towards those with a higher propensity to spend…”

Clio: Seems to me that I have heard of these three before…

Oeconomicarus: Yes. The third is basically J.A. Hobson’s Imperialism–that an unequal income distribution either required governments to dissipate huge amounts of wealth in conquest and colonization or suffer chronic depression. The second is, in a way, Hayek: that when the long-run rate of profit is not high enough to support the roundabout investments made, overaccumulation is inevitable, and it will then lead to necessary depressions. And the first is basically Friedman’s monetarist k%/year money-stock growth rule as a “neutral” monetary policy, with the in petto corollary that the money-stock growth rate has to be high enough to give enough of an incentive to spend liquid assets for monetarism to gain traction…

Princeps Cogitationis: So why is the problem showing up now?

Oeconomicarus: Summers:

Slower population and possibly technological growth means a reduction in the demand for new capital…. Lower-priced capital goods means… given… saving… purchase[s] more capital…. Iconic cutting edge companies have traditionally needed to go the market to support expansion. Today leading edge companies like Apple and Google are attacked for holding on to huge cash hoards. Rising inequality… raise[s]… income going to those with a lower propensity to spend…. Greater risk aversion… and increased regulatory burdens… debt overhangs… increased uncertainty discourages borrowing… raise the wedge between safe liquid rates and rates charged to borrowers…

Jean-Baptiste Say: But the market can fix it, right? I mean, as long as there are any ways to durably store purchasing power, all you have to do is push the real interest rate below zero for long enough and demand for investment in such storage will rise to get us to full employment, right?

Oeconomicarus: Not if a lack of trust in financial markets creates a failure to mobilize the economy’s risk-bearing capacity…

Thrasymachus: How much would you trust Citigroup or JPMC right now if it told you it had a gold-plated risk-free profitable long-run investment vehicle that you could buy?

Princeps Cogitationis: So if we don’t fix this, what happens to us?

Oeconomicarus: Perhaps a 15% reduction in our prosperity relative to what we might have attained, followed by permanently slower growth thereafter:

Potential output has declined almost everywhere and in near lockstep with declines in actual output…. When enough investment is discouraged in physical capital, work effort and new product innovation… ‘Lack of Demand creates Lack of Supply’… potential declines, the [natural rate of interest] rises, restoring equilibrium, albeit not a very good one…

Princeps Cogitationis: Suppose I sign up for Summers’s “Third Way” policy of radical income redistribution on the first hand, restoration of business confidence and increases in the rate of profit via the government providing various puts to risk-takers and entrepreneurs on the second hand, and aggressive expansionary infrastructure-oriented fiscal policy on the third hand–and it doesn’t work. What is wrong with a higher inflation target?

Apollo: I must say, it does seem rather Delphic: Summers says:

Even if the zero interest rate constraint does not literally bind, there is the possibility that the positive interest rate consistent with full employment is not consistent with financial stability. Low nominal and real interest rates… increase risk taking as investors reach for yield, promote irresponsible lending as coupon obligations become very low and easy to meet, and make Ponzi financial structures more attractive as interest rates look low relative to expected growth rates…. Operating with a higher inflation rate target… or… finding ways such as quantitative easing that operate to reduce credit or term premiums… are also likely to increase financial stability risks…

Oeconomicarus: Perhaps it is best to say that effective price stability–the expectation of stable 2%/year inflation–is a very costly, hard-won, and valuable property of a market economy. It greatly reduces inflation-tax distortions and allows for more accurate economic calculation. It should not lightly be thrown away. And there is no reason to throw it away: progressive income redistribution, the proper mobilization of the economy’s entrepreneurial risk-bearing capacity, and a proper infrastructure-investment oriented fiscal policy can in all likelihood do the full job by themselves.

Princeps Cogitationis: You have just made me sit through a twenty-minute dialogue! I could have read Summers’s original piece in ten minutes!

Thrasymachus: But you wouldn’t have read it, would you? And if you had you wouldn’t have understood it because you would still be ignorant of the proper intellectual context.

Princeps Cogitationis: But how do I boil this down to soundbites? I need soundbites–preferably scary ones about risks that make people sit up and pay attention!

Oeconomicarus: Sorry. Can’t help you. The secular stagnation income has very high asset prices and healthy profits because the lousy labor market produces a depressed labor share. It’s not very good for entrepreneurs. But it’s not the kind of thing to scare the currently rich–that is one big reason we are right now in it.

Thrasymachus: If you want soundbites, go over there to practice “We just jumped the gun on our forecast of hyperinflation! Obamacare is collapsing under its own weight! Massive debasement from quantitative easing is still great threat! Lowering interest rates is a cause of deflation! The spike in the VIX this October proves it” with John Cochrane, Niall Ferguson, Douglas Holtz-Eakin and company…

Princeps Cogitationis: Douglas Holtz Eakin?

Thrasymachus: Yep: Holtz-Eakin says he is going to declare victory, someday:

“The clever thing forecasters do is never give a number and a date. They are going to generate an uptick in core inflation. They are going to go above 2 percent. I don’t know when, but they will…”

plus:

There once was a Fed that did QE II
But got no growth for me and you
It then doubled its bet
Until it tapered out, yet
They still don’t know what to do

Oeconomicarus: (whimpering) But it was QE III, not QE II (sob)…

Apollo: What October 2014 spike in the VIX?

Thrasymachus: You need to look more closely:

or:

Princeps Cogitationis: But I don’t want my soundbites to be wrong! And I do need soundbites!

Oeconomicarus: Tough…

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