Dialogue Archives

Must-Read: Ben Thompson: Grantland and the (Surprising) Future of Publishing

Posted on November 4, 2015 by Brad DeLong

Must-Read:Ben Thompson: Grantland and the (Surprising) Future of Publishing: “As a reader this is frustrating…

…Vox stripped down to the political and policy coverage that is its raison d’être would almost certainly rate as a destination site for me; instead, faced with a deluge of rewrites and summarized videos, I miss most of the good stuff save for what I stumble across on social media. I’m certainly not going to waste my time wading through the filler on the homepage…. Still… Vox is… thriving while Grantland… is dead…. The only destination sites that really seem to be working either have massive brand equity that is being leveraged into subscriptions… or are tiny one-person operations that leverage the Internet to keep costs sustainably low while monetizing through small-scale native advertising (e.g. Daring Fireball and the now-retired Dooce.com, for example) or subscriptions (e.g. The Timmerman Report and the site you’re reading)…. The lesson of Grantland is that there is no room in the middle: not enough scale for advertising, and costs that are far too high for a viable subscription business…

Must-Read: Robinson Meyer: The Decay of Twitter

Posted on November 3, 2015 by Brad DeLong

Robinson Meyer: The Decay of Twitter: “Anthropologists who study digital spaces have diagnosed that a common problem of online communication…

…is ‘context collapse.’ This plays with the oral-literate distinction: When you speak face-to-face, you’re always judging what you’re saying by the reaction of the person you’re speaking to. But when you write (or make a video or a podcast) online, what you’re saying can go anywhere, get read by anyone, and suddenly your words are finding audiences you never imagined you were speaking to. I think Stewart is identifying a new facet of this. It’s not quite context collapse, because what’s collapsing aren’t audiences so much as expectations. Rather, it’s a collapse of speech-based expectations and print-based interpretations. It’s a consequence of the oral-literate hybrid that flourishes online. It’s conversation smoosh…

Must-Read: Paul Krugman: I do not think that word…<

Posted on November 2, 2015 by Brad DeLong

Must-Read: When did the default definition of “expansionary fiscal policy” become not (1) “the government hires people to build a bridge”, but rather (2) “the government borrows money from some people and writes checks to others, thus raising both current financial assets and expected future tax liabilities”? Or, rather, for what communities did it become (2) rather than (1), and why?

Or, perhaps, when did the deficit become the off-the-shelf measure of the fiscal-policy stance, rather than some other measure that incorporated some role for the balanced-budget multiplier?

This is something I really ought to know, but do not. It is bad that I do not know this:

Paul Krugman: I do not think that word…: “…means what Tyler Cowen and Megan McArdle think it means…

…The word in question is ‘spending.’ Tyler’s latest on temporary versus permanent government consumption clarifies… the confusion…. By ‘government spending’… I mean the government actually, you know, buying something–say, building a bridge. When Tyler says

The Keynesian boost to aggregate demand arises because people consider the resulting bonds to be ‘net wealth’ even when they are not,

the only way that makes sense is if he’s thinking of a rebate check. If the government builds a bridge, the boost to aggregate demand comes not because people are ‘tricked’ into feeling wealthier, but because the government is building a bridge. The question then is how much of that direct increase in government demand is offset by a fall in private consumption because people expect their future taxes to be higher; obviously that offset is smaller if they think the bridge is a one-time expense than if they think there will be a bridge built every year. That’s why temporary government spending has a bigger effect…. I guess there’s an alternative theory of what Tyler is talking about–maybe he doesn’t consider the wages of the bridge-builders count, that only what they do with those wages matters…

Or, rather, that all government expenditure is wasteful, and you might have well have simply handed out checks rather than forced people to engage in pointless useless make-work.

Cracking the Hard Shell of the Macroeconomic Knut: “Keynesian”, “Friedmanite”, and “Wicksellian” Epistemes in Macroeconomics

Posted on November 1, 2015December 15, 2015 by Brad DeLong

The very-sharp Tyler Cowen gets one, I think, more wrong than right. He writes:

Tyler Cowen: What’s the Natural Rate of Interest?: “I… find all this talk of natural rates of interest…

…historically strange. A few points: (1) David Davidson and Knut Wicksell debated the… concept very early in the twentieth century, in Swedish…. Most people believe Davidson won…. (2) Keynes devoted a great deal of effort to knocking down the natural rate of interest…. There could be multiple natural rates… [or] no rate of interest whatsoever…. (3) In postwar economics, the Keynesians worked to keep natural rates of interest concepts out….

(4) The older natural rate of interest used to truly be about price stability… [not] “two percent inflation a year.”… (5) Milton Friedman warned (pdf) not to assign too much importance to interest rates…. (6) When Sraffa debated Hayek and argued the natural rate of interest was not such a meaningful concept, it seems Sraffa won…. (7) I sometimes read these days that the “natural [real] rate of interest” consistent with full employment is negative. To me that makes no sense in a world with positive economic growth and a positive marginal productivity of capital….

Of course economic theory can change, and if the idea of a natural rate of interest makes a deserved comeback we should not oppose that development per se. But I don’t see that these earlier conceptual objections have been rebutted, rather there is simply now a Kalman filter procedure for coming up with a number…. In any case, this is an interesting case study of how weak or previously rebutted ideas can work their way back into economics. I don’t object to what most of the people working on this right now actually are trying to say. Yet I see the use of the term acquiring a life of its own, and as it is morphing into common usage some appropriately modest claims are taking on an awful lot of baggage from the historical connotations of the term…

In my view, all (7) of these are more than debatable. For example, (7): “[That] the ‘natural [real] rate of interest’ consistent with full employment is negative… makes no sense in a world with positive economic growth and a positive marginal productivity of capital…” misses the wedge–the wedge between the (positive) expected real rate of return from risky investments in capital and the (positive) temporal slope to the expected inverse marginal utility of consumption, on the one hand; and the (negative) equilibrium real low-risk interest rate, on the other hand.

In a world that is all of a global savings-glut world with large actors seeking portfolios that provide them with various kinds of political risk insurance, risk-tolerance gravely impaired by the financial crisis and the resulting deleveraging debt supercycle, moral hazard that makes the remobilization of societal risk-bearing capacity difficult and lengthly, and reduced demographic and technological supports for economic growth, it seems to me highly plausible that this wedge can be large enough to make the low-risk ‘natural [real] rate of interest’ consistent with full employment negative alongside positive economic growth and a positive marginal productivity of capital.

And the bond market agrees with me in email:

Graph Long Term Government Bond Yields 10 year Main Including Benchmark for Germany© FRED St Louis Fed

Graph 10 Year Treasury Inflation Indexed Security Constant Maturity FRED St Louis Fed

And (2): “Keynes devoted a great deal of effort to knocking down the natural rate of interest…” Indeed he did Keynes saw the natural rate of interest as part of a wrong loanable-funds theory of interest rates: that, given the level of spending Y, supply-and-demand for bonds determined the interest rate. Keynes thought that people must reject that wrong theory before they could adopt what he saw as the right, liquidity-preference, theory of interest rates: that, given the level of spending Y and the speculative demand for money S, supply-and-demand for money determined the interest rate.

I think Keynes was wrong. I think Keynes made an analytical mistake.

Hicks (1937) established that Keynes was wrong when he believed that you had to choose. You don’t. Because spending Y is not given but is rather jointly determined with the interest rate, you can do both. Indeed, you have to do both. Liquidity-preference without loanable-funds is just one blade of the scissors: it cannot tell you what the interest rate is. And loanable-funds without liquidity-preference is just the other blade of the scissors: it, too, cannot tell you what the interest rate is. You need both.

More important, however, in thinking about our present concern with the natural (“neutral”) (“equilibrium”) real rate of interest is knowledge of the historical path by which we arrived at our current intellectual situation. Alan Greenspan did it. On July 20, 1994, Alan Greenspan announced that the Federal Reserve was not a “Keynesian” institution, focused on getting the volume of the categories of aggregate demand–C, I, G, NX–right. He announced that the Federal Reserve was not a “Friedmanite” institution, focused on getting the quantity of money right. He announced that the Federal Reserve was now a “Wicksellian” institution, focused on getting the configuration of asset prices right:

Alan Greenspan (1994): Testimony before the Subcommittee on Economic Growth and Credit Formation of the Committee on Banking, Finance and Urban Affairs, U S House of Representatives, July 20: “The FOMC, as required by the Humphrey-Hawkins Act…

…set[s] ranges for the growth of money and debt…. M2 has been downgraded as a reliable indicator…. [The] relationship between M2 and prices that could anchor policy over extended periods of time… [has] broken down…. M2 and P-star may reemerge as reliable indicators of income and prices….

In the meantime… in assessing real rates [of interest], the central issue is their relationship to an equilibrium interest rate, specifically the real rate level that, if maintained, would keep the economy at its production potential over time. Rates persisting above that level, history tells us, tend to be associated with slack, disinflation, and economic stagnation–below that level with eventual resource bottlenecks and rising inflation, which ultimately engenders economic contraction. Maintaining the real rate around its equilibrium level should have a stabilizing effect…. The level of the equilibrium real rate… [can] be estimated… [well] enough to be useful for monetary policy…. While the guides we have for policy may have changed recently, our goals have not…

Greenspan thus shifted the focus of America’s macroeconomic discussion away from the level of spending and the quantity of money to the configuration of asset prices. In some ways this is no big deal: “Keynesian”, “Friedmanite”, and “Wicksellian” frameworks are all perfectly-fine ways to think about macroeconomic policy. They are different–some ideas and some factors are much easier to express and focus on and are much more intuitive in one of the frameworks than in the others. But they are not untranslateable–I have not found any point that you can express in one framework that cannot be more-or-less adequately translated into the others.

The point, after all, is to find a macroeconomic policy that will make Say’s Law, false in theory, true enough in practice for government work. You can start this task by focusing your analysis first on either spending, or liquidity, or the slope of the intertemporal price structure. You will almost surely have to dig deeper into the guts of the economy in order to understand why the current emergent macro properties of the system are what they are. But any one of the languages will do as a place to start. Greenspan in the mid-1990s judged that the Wicksellian language provided the best way to communicate. And, looking back over the past 25 years, I cannot really disagree.

But at the time, back in 1994, the shift to a Wicksellian episteme led to substantial confusion. As I remember it, I spent my lunchtime on July 20, 1994, seated at my computer in my office on the third floor of the U.S. Treasury, frantically writing up just what Alan Greenspan was talking about when he said (1) pay no attention to Federal Reserve policy forecasts of M2; instead, (2) pay attention to our assessments of the relationship of interest rates to an equilibrium interest rate. Greenspan announced that the Fed was no longer asking in a Friedmanite mode “do we have the right quantity of money?”, but rather was asking in a Wicksellian mode “do we have the right configuration of interest rates”. And that still does not seem to me to be a bad place to be.

Must-Read: Mark Thoma: Truth-Defying Feats

Posted on October 31, 2015 by Brad DeLong

Must-Read: Mark Thoma: Truth-Defying Feats: “By Rick Perlstein:…

…Step right up! Be amazed, be enchanted, by the magic GOP unicorn-and-rainbow-producing tax cut machine! It takes a lot of energy to sustain a lie. When enough people do it together, over a sustained period of time, it wears on them. It also produces a certain kind of culture: one cut loose from the norms of fair conduct and trust that any organization requires in order to survive as something more than a daily, no-holds-barred war of all against all. A battle royale. A circus, if you prefer. And the act in the center ring? The Amazing Death Spiral. One performer does something so outrageous that anyone else who wishes to further hold the audience’s attention has to match or top it––even if they know it’s insane…. That’s what poor old John Kasich did. Hear him cry about his:

great concern that we are on the verge, perhaps, of picking someone who cannot do this job. I’ve watched people say that we should dismantle Medicare and Medicaid…. I’ve heard them talking about deporting 10 or 11 [million] people from this country…. I’ve heard about tax schemes that don’t add up.’

And what happened to him? Read the snap poll from Gravis research. Only 3 percent of Republicans thought he won the debate….

David Brooks says not to worry if candidates are lying about their economic plans, they are just exaggerating to make themselves more attractive to conservative voters…. Paul Krugman is, shall we say, unconvinced….

‘What matters is how a candidate signals priorities.’ Yes, and the priority seems to be lying is okay to get what you want. That’s a great trait to have in a president who might fact the decision to send our kids to die in a war he or she wants. Oh wait.”

Weekend Reading: Diane Coyle (2012): Do Economic Crises Reflect Crises in Economics?

Posted on October 31, 2015 by Brad DeLong

Diane Coyle (2012): Do Economic Crises Reflect Crises in Economics?: “The problems with economics: (1) Theory…

…There is a well-known joke about economic methodology. Two friends are walking along when one spots a €50 note on the floor. “Look!” he says, “Let’s pick up the money.” His friend, an economist, replies: “No, don’t bother. If it were really there, somebody would have picked it up already.” The joke of course is about the lack of realism in the assumptions economists conventionally make in order to analyse the real world….

In practice, the version of this assumption used in applied analysis is rarely as strong. In practice, it is more like: given the limited information available to them, and the various transaction costs they face in taking certain courses of action, and given that the future is very uncertain, we’ll assume people act broadly in their self-interest, however they would define that. I would strongly defend the use of this contingent version of the standard assumption as it’s a powerful analytical tool…. Modern institutional economics, which is a thriving area of research, is founded on the use of the rationality assumption as a tool of analysis. If people do not seem to be making the rational choice, then looking at the difference between what would happen if they did so and the reality is instructive….

I would defend using the assumption of rational choice as long as one realises that it is not a description of reality. But there is one area where for 30 years economists – and others – have been making that mistake. That is, unfortunately, of course, in the financial markets. Practitioners and policy makers acted as if the strong form of the Efficient Markets Hypothesis held true – in other words that prices instantly reflect all relevant information about the future – even though this evidently defies reality. What’s more, a political philosophy valuing limited government leapt on what was taken as proof that markets left to themselves deliver better economic outcomes. This was translated as the deregulation of markets, especially financial markets, and became entwined with the growing importance of the finance sector in the economy globally. So politics fed the trend. The computer and communications technologies fed the trend as well, by making more and more financial transactions possible.

I think an honest conventionally-trained economist has to at least acknowledge that we grew intellectually lazy…. A particular ideological version of economics became the framework for analysing public policy, and very few mainstream economists challenged that. We got on with our work and ignored the importance of the public rhetoric….

A looser version is that a public sphere founded on the world view of narrow, rational choice economic models has over time led people to behave like the selfish, calculating beings assumed in those models. If regulations assume that you are going to behave in a certain way, there must surely be a temptation to live up to the assumption. I don’t know if this theory of economic performativity is true; perhaps the causality runs the other way, and a period of free-market politics especially in the US and UK changed the character of economics? We can’t test these alternatives, but this criticism is worth considering….

The financial and economic crisis [thus] spells a crisis for certain areas of economics, or approaches to economics. Financial economics and macroeconomics are particularly vulnerable. They are the subject areas where the consequences of the standard assumptions have been most damaging, because they are actually least valid. Financial market traders are not remotely like Star Trek’s Mr Spock, making rational calculations unaffected by emotion or by the decisions of other people. Macroeconomics – the study of how millions of individual decisions aggregate into economy-wide measures – is essentially ideological. How macroeconomists answer a question like ‘What will be the effect of cutting the budget deficit on growth next year?’ depends on their political views. This is not remotely a scientific area of the discipline….

I can’t omit here a few other problems with economics as it has been practised… the economics curriculum in universities… gives too much time to macroeconomics, on which as I just argued there is no professional consensus…. They have little sense of economic history…. Students are also not systematically taught new aspects of the subject…. Undergraduates are also taught as if they are all planning to go on to study for a doctorate and become academic economist…. Finally, many of these under-cooked economics graduates go on to work in government…. There are some good reasons for this special status – I’m about to come on to those – but the influence economists have in government needs seasoning with a corresponding degree of humility. One side-effect of the crisis may be to make economists a bit more humble, which would be a good result.

Department of “Huh!?!?”: QE Has Retarded Business Investment!?

Posted on October 27, 2015October 27, 2015 by Brad DeLong

Kevin Warsh and Michael Spence attack Ben Bernanke and his policy of quantitative easing, which they claim “has hurt business investment.”

2015 10 06 for 2015 10 07 DeLong ULI key

I score this for Bernanke: 6-0, 6-0, 6-0.

In fact, I do not even think that Spence and Warsh understand that one is supposed to have a racket in hand when one tries to play tennis. As I see it, the Fed’s open-market operations have produced more spending–hence higher capacity utilization–and lower interest rates–has more advantageous costs of finance–and we are supposed to believe that its policies “have hurt business investment”?!?!

Michael Spence and Kevin Warsh: The Fed Has Hurt Business Investment: “Bernanke[‘s view]… may well be true according to economic textbooks…

…But textbooks presume the normal conduct of policy and that the prices of financial assets like stocks and bonds are broadly consistent with expectations for the real economy. Nothing could be further from the truth in the current recovery…. Earnings of the S&P 500 have grown about 6.9% annually… pales in comparison to prior economic expansions… half of the profit improvement… from… share buybacks. So the quality of earnings is as deficient as its quantity…. Extremely accommodative monetary policy… $3 trillion in… QE pushed down long-term yields and boosted the value of risk-assets…. Business investment in the real economy is weak. While U.S. gross domestic product rose 8.7% from late 2007 through 2014, gross private investment was a mere 4.3% higher. Growth in nonresidential fixed investment remains substantially lower than the last six postrecession expansions….

As I have said before and say again, weakness in overall investment is 100% due to weakness in housing investment. Is there an argument here that QE has reduced housing investment? No. Is nonresidential fixed investment below where one would expect it to be given that the overall recovery has been disappointing and capacity utilization is not high? No. The U.S. looks to have an elevated level of exports, and depressed levels of government purchases and residential investment. Given that background, one would not be surprised that business investment is merely normal–and one would not go looking for causes of a weak economy in structural factors retarding business investment. One would say, in fact, that business investment is a relatively bright spot.

Yes, businesses have been buying back shares. How would the higher interest rates and higher risk spreads in the absence of QE retard that? They wouldn’t. Yes, earnings growth from business operations over the past five years has been slower than in earlier expansions. How has QE dragged on earnings growth. It hasn’t.

Efforts by the Fed to fill near-term shortfalls in demand… have shown limited and diminishing signs of success. And policy makers refuse to tackle structural, supply-side impediments to investment growth, including fundamental tax reform.

And the Federal Reserve’s undertaking of QE has hampered efforts to engage in “fundamental tax reform” how, exactly? Is an argument given here? No, it is not.

We believe that QE has redirected capital from the real domestic economy to financial assets…. How has monetary policy created such a divergence between real and financial assets?

OK: Now there is a promise that there will be some meat in the argument.

How do Spence and Warsh say QE has reduced corporate investment? Let’s look:

First, corporate decision-makers can’t be certain about the consequences of QE’s unwinding on the real economy… [that] translates into a corporate preference for shorter-term commitments–that is, for financial assets….

Let’s see: when QE is unwound, asset prices are likely to fall. The period of QE may have boosted the economy and created a virtuous circle–in which case unwinding QE will still leave asset prices higher than they would have been in its absence. Unwinding QE may return asset supplies and demands to where they would have been if it had never been undertaken–in which asset prices will be what they would have been in its absence. Is there a story by which first winding and then unwinding QE leaves asset prices afterwards lower than in QE’s absence? Is there? Anyone? Anyone? Bueller?

Without an argument that the round-trip will leave lower asset prices than the absence of QE, this “uncertainty” argument is incoherent. No such argument is offered.

And I cannot envision what such an argument would be.

The financial crisis taught an important lesson…. Illiquidity can be fatal….

So in the absence of QE people would have forgotten about the financial crisis and would be eager to get illiquid–no, wait a minute! This is not an argument that QE has depressed business investment.

QE reduces volatility in the financial markets, not the real economy…. Much like 2007, actual macroeconomic risk may be highest when market measures of volatility are lowest…

QE reduces volatility in financial markets by making some of the risk tolerance that was otherwise soaked up bearing duration risk free to bear other kinds of risk. That is what it is supposed to do. With more risk tolerance available, more risky real activities will be undertaken–and so microeconomic risk will grow. A higher level of activity with more risky enterprises being undertaken is the point of QE. To say that it pushes up macroeconomic risk is to say that it is doing its job, isn’t it? If that isn’t its job, then there needs to be an argument to that effect, doesn’t there? I do not see one.

QE’s efficacy in bolstering asset prices may arise less from the policy’s actual operations than its signaling effect…

The originator of the idea of signaling equilibrium thinks that such a thing is bad? If QE has effects because it is an informative signal, then it is a good thing as long as its dissipative costs are not large. Is an argument offered that its dissipative costs are large? No. Is there reason to think that its dissipative costs are large? No.

We recommend a change in course. Increased investment in real assets is essential to make the economic expansion durable.

And unwinding QE more rapidly accomplishes this how, exactly? In the absence of QE increased investment in real assets would be higher why, exactly?

If you set out to take Vienna, take Vienna. If you are going to argue that QE has reduced real business investment, argue that QE has reduced real business investment. I see no such argument anywhere in the column.

So Warsh and Spence should not be surprised at my reaction: “Huh!?!?!” and “WTF!?!?!?!?”

And Mitt Romney Throws Off the Mask!

Posted on October 23, 2015 by Brad DeLong

Mitt Romney: [The late Staples founder Thomas Stemberg was] an extraordinarily creative and dynamic visionary…. Mr. Stemberg was one of the great business leaders…

…of our state and our nation,’ Romney said. ‘He was not only the founder, but someone who grew the company to a multi-billion dollar enterprise. He built an industry that employs thousands and thousands of people…. Without Tom pushing it, I don’t think we would have had Romneycare. Without Romneycare, I don’t think we would have Obamacare. So, without Tom a lot of people wouldn’t have health insurance…

Mind you, Romney could claim he was criticizing the late Tom Stemberg–“without Tom, a lot of people wouldn’t have health insurance through RomneyCare and ObamaCare, and that would be a better world than this.” But somehow I don’t think Romney is going to go there.

I mean… Romney had so many opportunities over the past six years to play a constructive role… He took advantage of none of them… I… I can’t even…

Must-Read: Greg Sargent: Freedom Frauds

Posted on October 15, 2015December 15, 2015 by Brad DeLong

Must-Read: Greg Sargent: Freedom Frauds: “David Brooks is getting a lot of positive attention today for this column…

…in which he dissolves into despair and anxiety over what has become of today’s ‘radical’ and ‘ungovernable’ Republican Party…. All of this is well and good as far as it goes. But I think it neglects one of the most plausible explanations for what’s happening: A lot of what we’re seeing today may not be the result of the radicalized faction’s ‘incompetence,’ but rather the result of its fraudulence and hucksterism…. It isn’t that [the Tea Party are] too incompetent to realize that these [shutdown-threatening] tactics [will] fail. Rather… they [keep] alive the charade for far too long that these tactics would ultimately force Democrats to surrender… not… frauds… getting… to continue telling the story they want to tell.

Connect with us

Tag: Dialogue