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Principles that Should Govern American Fiscal Policy

Posted on November 9, 2016 by Brad DeLong

Employment Level 25 to 54 years FRED St Louis Fed

Well, that was a very interesting election night. Our failure in 2000 to introduce into the running code (as opposed to the specification document) of our constitution that electors switch votes so that the national popular vote winner wins the electoral college cost us dear in 2000, and may cost us even more today…

You may ask: How is one to judge what to do in such times? The answer is clear: As one has ever judged. Good and evil have not changed since yesteryear, nor are they one thing among Elves and another among Men. It is a human’s part to discern them, as much in the Golden Wood as in his own house. What would have been good policy yesterday would still be good policy today. What would have been bad policy yesterday would still be bad policy today. So we play our position.

I therefore set forth seven principles that should govern good technocratic fiscal policies that promise to enhance America’s societal well-being :

Preserve Our Credit
Our National Debt a National Blessing
Right Now Our National Debt Is too Low
International Agencies Agree
Benefits from a Higher Deficit If We Are at Full Employment
Benefits from a Higher Deficit If We Are Not at Full Employment
A Strong Argument for More Government Purchases Rather than Tax Cuts for the Rich
Preserve Our Credit: President-elect Donald Trump has been told by many that our national debt is too high and dangerous. He has responded as one would expect a real estate developer would respond. He has proposed taking steps to shake the confidence of our creditors, and then to buy back our debt, at a heavy discount, thus removing the danger. This is a substantial misreading of the situation. Market confidence in the credit worthiness of the United States of America is an extremely valuable asset, from which we derive much benefit, and which it would be folly to throw away.
Our National Debt a National Blessing: In fact, at the moment, with interest rates where they are now and are expected to be for the foreseeable future, our national debt is not a burden but a blessing. It is not a drain on the Treasury but a source of wealth for the Treasury. If we do our accounts using a reasonable benchmark–setting our goal to be keeping our available physical space constant–we find that, at the levels of interest rates we see now and expect to see for the foreseeable future, a lower national that would not allow us to lower but would require us to raise taxes in order to maintain the given level of spending. The United States right now is not in the position of a cash-strapped borrower forced to pay interest. The United States right now is, rather, in the position of something like the medieval Medici bank, which people pay to safeguard their money.
Right Now Our National Debt Is too Low: The fact is that our national debt, right now, is not a burden but a profit center. That implies that, whatever you think of the long-term multi-generational fiscal outlook, right now our national debt is not too high but too low. That is the case unless one confidently anticipates a rapid and substantial increase in interest rates in the relatively near future. This was, in fact, one of the major lesson of the big article that Larry Summers and I wrote for the Brookings Institution back in 2012.
International Agencies Agree: Note that, after four years of argument, the IMF and other international agences agree with Larry and my technocratic judgment that right now our national debt is too low, and thus that good economic policy requires higher deficits right now, not budget balance.
Benefits from a Higher Deficit If We Are at Full Employment: Right now, only the extremely rash would definitely claim to know one way or the other whether the United States is at full employment–whether further increases in the employment-to-population ratio would (1) start an inflationary spiral and require the Federal Reserve to raise interest rates to lower employment back down to its current level, or (2) bring large numbers of discouraged workers back into the labor force and make America richer. If the answer is (1), there are still substantial benefits to an economic policy stance, right now and for the foreseeable future as long as the global configuration of savings supply and investment demand is not transformed, with a larger deficit and tighter money and hence higher interest rates. Higher interest rates would restore the health of the banking sector. Higher interest rates might discourage the blowing of potentially dangerous bubbles. The drawback of raising interest rates–the reason that the Federal Reserve has not done so–is that it lowers employment. But if that reduction in employment is offset by an increase in the deficit that boosts employment, hit becomes a no-drawbacks policy.
Benefits from a Higher Deficit If We Are Not at Full Employment: Right now, only the extremely rash would definitely claim to know one way or the other whether the United States is at full employment–whether further increases in the employment-to-population ratio would (1) start an inflationary spiral and require the Federal Reserve to raise interest rates to lower employment back down to its current level, or (2) bring large numbers of discouraged workers back into the labor force and make America richer. If the answer is (2), there are massive benefits to an economic policy stance of running larger deficits–the benefit of raising employment and making people richer, and making those people richer who have suffered the most since the subprime crisis and crash of 2008.
A Strong Argument for More Government Purchases Rather than Tax Cuts for the Rich: If America does decide to run larger deficits, there are large benefits from choosing to do so by increasing government purchases than by cutting taxes, especially for the rich. Increasing government purchases puts to work and improves the lot of the people who have suffered the most since the subprime crisis and crash of 2008. And cutting taxes–especially for the rich–has much smaller effects on the balance between savings and the capital inflow on the one hand and investment and government borrowing on the other. Since the effectiveness of the policy in putting people to work and in creating space for the Federal Reserve to raise interest rates to a healthy level without harming employment depends on this investment-savings balance, there is much more bang for a buck of government purchases than from a buck of tax cuts.

DeLong Smackdown Watch: Simon Wren-Lewis and Ann Pettifor Take Their Whacks

Posted on November 7, 2016 by Brad DeLong

Simon Wren-Lewis: Ann Pettifor on mainstream economics: “Ann has a article that talks about the underlying factor behind the Brexit vote…

…Her thesis, that it represents the discontent of those left behind by globalisation, has been put forward by others. Unlike Brad DeLong, I have few problems with seeing this as a contributing factor to Brexit, because it is backed up by evidence, but like Brad DeLong I doubt it generalises to other countries…

Simon Wren-Lewis: A divided nation: “There is no reason why we need to choose between the economic and the social types of explanation…

…Kaufmann and Johnston et al can both be right. As Max Wind-Cowie says (quoted by Rick here):

Bringing together the dissatisfied of Tunbridge Wells and the downtrodden of Merseyside is a remarkable feat, and it stems from UKIP’s empathy for those who have been left behind by the relentless march of globalisation and glib liberalism.

Both these explanations see antagonism to the idea (rather than the actuality) of migration as the way an underlying grievance got translated into a dislike of the EU. But was immigration really so crucial? A widely quoted poll by Lord Ashcroft says a wish for sovereignty was more important. The problem here, of course, is that sovereignty – and a phrase like taking back control – is an all embracing term which might well be seen as more encompassing than just a concern about immigration. It really needs a follow-up asking what aspects of sovereignty are important. If we look at what Leavers thought was important, the “ability to control our own laws” seemed to have little to do with the final vote compared to more standard concerns, including immigration.

However there are other aspects of the Ashcroft poll that I think are revealing. First, economic arguments were important for Remain voters. The economic message did get through to many voters. Second, the NHS was important to Leave voters, so the point economists also made that ending free movement would harm the NHS was either not believed or did not get through to this group. Indeed “more than two thirds (69%) of leavers, by contrast, thought the decision “might make us a bit better or worse off as a country, but there probably isn’t much in it either way””. Whether they did not know about the overwhelming consensus among economists who thought otherwise, or chose to ignore it, we cannot tell.

Third, Leave voters are far more pessimistic about the future, and also tend to believe that life today is much worse than life 30 years ago. Finally, those who thought the following were a source of ill rather than good – multiculturalism, social liberalism, feminism, globalisation, the internet, the green movement and immigration – tended by large majorities to vote Leave. Only in the case of capitalism did as many Remain and Leave voters cite it as a source of ill. These results suggest that Leave voters were those left behind in modern society in either an economic or social way (or perhaps both).

Taking all this evidence into account it seems that the Brexit vote was a protest vote against both the impact of globalisation and social liberalism. The two are connected by immigration, and of course the one certainty of the Brexit debate was that free movement prevented controls on EU migration. But that does not mean defeat was inevitable, as Chris makes clear. Kevin O’Rourke points out that the state can play an active role in compensating the losers from globalisation, and of course in recent years there has been an attempt to roll back the state. Furthermore, as Johnston et al suggest, the connection between economic decline and immigration is more manufactured than real. Tomorrow I’ll discuss both the campaign and what implications this all might have.

Best Business Books 2016: Economy

Posted on November 1, 2016 by Brad DeLong

Over at Strategy+Business: Best Business Books 2016: Economy: The Crisis Is Over: Welcome to the New Crisis:

Robert J. Gordon: The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War (Princeton University Press, 2016) http://amzn.to/2eYBETT
Adair Turner: Between Debt and the Devil: Money, Credit, and Fixing Global Finance (Princeton University Press, 2015) http://amzn.to/2fahiHY
Jacob S. Hacker and Paul Pierson: American Amnesia: How the War on Government Led Us to Forget What Made America Prosper (Simon & Schuster, 2016) http://amzn.to/2ekuOdg

It’s been quite a decade for the global economy. The popping of the American housing bubble in 2006, the subprime mortgage financial crisis and its spread to Wall Street in 2007–08, the collapse of the world economy into the first global recession in decades in 2008–09, the knock-on eurozone financial crisis that began in 2010, and a slow, often faltering recovery — it’s been a tumultuous 10 years. And the period has produced a bumper crop of excellent economics books by academics, journalists, and practitioners who have attempted to grapple with the extraordinary macroeconomic disaster. They have examined why it happened, how to fix it, what it means, and how to avoid a recurrence of anything even remotely as hellish. Read MOAR at Strategy+Business

Bayesianism versus Smoothing: In Which I Surrender Unconditionally to Cosma Shalizi

Posted on October 31, 2016 by Brad DeLong

I think it is time for me to issue an unconditional intellectual surrender to Cosma Shalizi. Watching Nate Silver and his now http://fivethirtyeight.com over the past two election cycles has convinced me that the Bayesian framework he throws around his model is a major obstacle to people’s understanding what is going on.

What is going on is made up of three things:

Polling–that is, asking people what they think of the election candidates in a structured way.
Aggregation–so that you are not just using one sample of 1000 to assess the current mood of the electorate but instead have something like 1/5 of the sampling standard error.
Smoothing–imposing structure on the time series, both that it ought to be close to “fundamentals” and that it ought not to change too quickly.

But next to nobody reading Nate Silver and company’s “nowcast”, “polls-only”, and “polls-plus” forecast probabilities as they evolve overtime gets any sense of how the sausage is made.

It remains the case that the decision theorist in the subbasement dungeon of my brain whimpers that Bayesian posterior probabilities are what we ultimately want.

But, these days, when it says that, I gag and shorten its chain:

I point out to it that what we really want as decision theorists are not Bayesian posterior probabilities but rather the misnamed “risk neutral probabilities” that are posterior odds times the utility of the outcome.
I point out to it that if we are betting against other minds we need to know in what ways their information sets might be superior to ours and what disadvantage that puts us at: that invulnerability to a Dutch Book is a third-order consideration in a world in which others might will know of jacks of spades that will piss in your ear on command.
And I point out to it that the answer to the frequentest question, “how different might our conclusions have been had we drawn a different sample?” provides much more insight into whether our procedures are converging to something sensible than any ex-ante Bayesian proof that we knew in advance, before we start the analysis, that our procedures must converge.

So go visit Sam Wang: polls, aggregation, soothing, plus not unreasonable random drift strike zones are more helpful than three different sets of posterior odds–given my suspicion that there is right now no action from the 538.com stuff on the truck side of the polls plus odds…

How Seriously Should We Take the New Keynesian Model?

Posted on October 2, 2016 by Brad DeLong

Nick Rowe continues his long twilight struggle to try to take the New Keynesian-DSGE seriously, to understand what the model says, and to explain what is really going on in the New Keynesian DSGE model to the world. I said that I think this is a Sisyphean task. Let me expand on that here:

Now there is a long–and very successful–tradition in the natural sciences of taking the model that produces the right numbers seriously. Max Planck introduced a mathematical fudge in order to fit the cavity-radiation spectrum. Taking that fudge seriously produced quantum mechanics. Maxwell’s equations produced equivalent effects via two very different physical processes from moving a wire near a magnet and moving a magnet near a wire. Taking that equivalence seriously produced relativity theory.

And economists think they ought to be engaged in the same business of taking what their models say seriously. They shouldn’t. For one thing, their models don’t capture what is going on in the real world with any precision. For another, their models’ fudge factors lack hooks into possible underlying processes.

Now to business:

In the basic New Keynesian model, you see, the central bank “sets the nominal interest rate” and that, combined with the inflation rate, produces the real interest rate that people face when they use their Euler equation to decide how much less (or more) than their income they should spend. When the interest rate high, saving to spend later is expensive and so people do less of it and spend more now. When the interest rate is low, saving to spend later is cheap and so people do more of it and spend less now.

But how does the central bank “set the nominal interest rate” in practice? What does it physically (or, rather, financially) do?

¯_(ツ)_/¯

In a normal IS-LM model, there are three commodities:

currently-produced goods and services,
bonds, and
money.

In a normal IS-LM model, the central bank raises the interest rate by selling some of the bonds it has in its portfolio for cash and burns the cash it thus collects (for cash is, remember, nothing but a nominal liability of the central bank). It thus creates an excess supply (at the previous interest rate) for bonds and an excess demand (at the previous interest rate) for cash. Those wanting to hold more cash slow down their purchases of currently-produced goods and services (thus creating an excess supply of currently produced goods and services) and sell some of their bonds (thus decreasing the excess supply of bonds). Those wanting to hold fewer bonds sell bonds for cash. Thus the interest rate rises, the flow quantity of currently-produced goods and services falls, and the sticky price of currently-produced goods and services stays where it is. Adjustment continues until supply equals demand for both money and bonds at the new equilibrium interest rate and at a new flow quantity of currently produced goods and services.

In the New Keynesian model?…

Nick Rowe: Cheshire Cats and New Keynesian Central Banks:

How can money disappear from a New Keynesian model, but the Central Bank still set a nominal rate of interest and create a recession by setting it too high?…

Ignore what New Keynesians say about their own New Keynesian models and listen to me instead. I will tell you how it is possible…. The Cheshire Cat has disappeared, but its smile remains. And its smile (or frown) has real effects. The New Keynesian model is a model of a monetary exchange economy, not a barter economy. The rate of interest is the rate of interest paid on central bank money, not on bonds. Raising the interest rate paid on money creates an excess demand for money which creates a recession. Or it makes no sense at all.

I will take “it makes no sense at all” for $2000, Alex…

Either there is a normal money-supply money-demand sector behind the model, which is brought out whenever it is wanted but suppressed whenever it raises issues that the model builders want ignored, or it makes no sense at all…

The Clones of Jim Tobin vs. the Gravitational Pull of Chicago: A Paul Krugman Production…

Posted on September 20, 2016September 20, 2016 by Brad DeLong

The highly-esteemed Mark Thoma sends us to Paul Krugman. In praise of real science: “Some people… always ask, ‘Is this the evidence talking, or my preconceptions?’ And you want to be one of those people…”.

Paul’s most aggressive claim is that our economics profession in 2007 would have done a much better job of economic analysis and policy guidance in real time had it consisted solely of clones of Samuelson, Solow, Tobin–I would add Modigliani, Okun, and Kindleberger–as they were in 1970: that the vector of net changes in macroeconomics in the 1970s were of zero value, and that the vector of net changes in macroeconomics since have been of negative value as far as understanding the world in real time is concerned.

This is, I think, too strong–and Paul does not quite make that claim. Doug Diamond and Phil Dybvig (1983)? Andrei Shleifer and Rob Vishny (1997)? And, of course, that keen-sighted genius Paul de Grauwe (2011).

Paul K. might respond that:

Paul de G. is very close to a clone of Jim Tobin who spent fifteen years as a member of the Belgian parliament, to which I can only say “touché”.
And you could say that Diamond-Dybvig and Shleifer-Vishny are simply mathing-up Kindleberger (1978), or perhaps Bagehot (1873). But there is great value in the mathing-up.
And I am going to have to think about why I have so much softer a spot in my heart for Uncle Milton Friedman than Paul K. does.

But in essentials, yes: Rank macroeconomists in 2007 by how much their intellectual trajectory had been influenced by the gravitational pull o fEd Prescott, Robert Lucas, and even Milton Friedman. Those whose trajectories had been affected least understood the most about the world in which we have been enmeshed since 2007:

Paul Krugman: What Have We Learned From The Crisis?:

We’ve seen a lot of vindication for old, unfashionable ideas–oldies but goodies that got deemphasized, and in some cases effectively blackballed, in the decades following the 1970s, but have turned out to be remarkably useful practical guides….

I was always a bit unsure about my own bona fides. Obviously I’d been a professional success, but why? Was it truly because I’d been making a real contribution to our understanding of how the world works, or was I simply good at playing an academic game?… Then came the crisis… and… several immediate questions in which popular intuitions and simple macroeconomic models were very much at odds. Would budget deficits cause interest rates to soar? Practical men said yes; economists, at least those of us with certain tools in our boxes, said no. Would huge increases in the monetary base cause runaway inflation? Yes, said practical men, politicians, and a few economists; no, said I and others of like mind. Would fiscal austerity depress output and employment? No, said many important people; on the contrary, it would be expansionary, because it would raise confidence. Yes, a lot, said Keynesian-minded economists. And my team won three out of three. Goooaaal!…

Economists from 1970 or so… might well have done a better job responding to the crisis than the economists we actually had on hand…. Tobin was one of the last prominent holdouts against the Friedman-Phelps natural rate hypothesis…. Friedman, Phelps, and their followers argued that any attempt to hold unemployment persistently below the natural rate would lead to ever-accelerating inflation; and their models implied, although this is rarely stressed, that an unemployment rate persistently above the natural rate would lead to ever-declining inflation and eventually accelerating deflation. Tobin was, however, skeptical…. Phillips tradeoffs that persist in the long run, at least at low inflation….

For reasons not completely persuasive to me, the standard response of macroeconomists to the failure of deflation to materialize seems to be to preserve the Friedman-Phelps type accelerationist Phillips curve, but then assert that expected inflation is “anchored”, so that it ends up being an old-fashioned Phillips curve in practice. We can debate why, exactly, we’re going this way. But… Tobin’s 1972 last stand against the natural rate turns out to be a better guide to the post-2008 landscape than just about anything written in the 35 years that followed….

The U.S. Federal funds rate hit zero in late 2008, with the economy still in a nosedive. The Fed responded with the first round of quantitative easing…. Meanwhile, the budget deficit soared…. What effect would these radically unusual policies have? The answer from quite a few public figures was to predict soaring inflation and interest rates. And I’m not just talking about the goldbugs… Allan Meltzer and Martin Feldstein warned about the coming inflation, joined by a Who’s Who of the Republican establishment. Academics like Niall Ferguson and John Cochrane warned about massive crowding out of private investment. But old-fashioned macro, with something like IS-LM at its base, offered startlingly contrary predictions at the zero lower bound…. And sure enough, inflation stayed low, as did interest rates.

IJT-style macro also made a prediction about the output effects of fiscal policy – namely, that it would have a substantial multiplier at the zero lower bound…. Chicago’s Cochrane insisted that the old-fashioned macro behind it had been “proved wrong.” Robert Lucas denounced Christina Romer’s use of multiplier analysis as “shlock economics,” basing his argument on a garbled version of Ricardian equivalence…. Jean-Claude Trichet sunnily declared that warnings about the contractionary impact of austerity were “incorrect”…. A few years on, and the old-fashioned Keynesian analysis looks pretty good… a multiplier around 1.5…. Which just happens to be the multiplier Christy Romer was assuming….

But wait, we’re not quite done. One aspect of the post-2008 story that apparently surprised many people, even smart economists like Martin Feldstein, was that huge increases in the monetary base didn’t seem to produce much rise in broader monetary aggregates, leading to claims that something strange was going on–that maybe it was all because the Fed was paying interest on excess reserves. But the same thing happened in Japan in the early 2000s, without any special interest payments….

The bottom line is that the crisis and its aftermath have actually provided a powerful vindication of macroeconomic models. Unfortunately for many economists, the models it vindicates are more or less vintage 1970. It’s far from clear that anything later added to our ability to make sense of events, and developments in macro over the course of the 80s and after may even have subtracted value….

What looks useful is a sort of looser-jointed approach: ad hoc Hicks-Tobin-type models, with simple models of financial market failure on the side…. For those seeking a definitive, integrated approach this will seem pitifully inadequate; and if I were a young academic seeking tenure I’d run away from all of this and either do empirical work or shun macro altogether. But models don’t have to rigorously dot all i’s and cross all t’s–let alone satisfy the peculiar criteria that modern macro calls “microfoundations”–to be very useful in practice…

Brookings Productivity Festival: DeLong Edited Transcript (September 9, 2016)

Posted on September 15, 2016 by Brad DeLong

The Productivity Puzzle: How Can We Speed Up the Growth of the Economy?

First, I need to stop flashing to the dystopian future which Bronwyn here has made me imagine. It is one in which drones overfly my house with chemical sensors constantly sniffing to see if I am cooking Kung Pao Pastrami–without having bought the required intellectual property license from Mission Chinese…

Deep breath…

Three big things have been going on with respect to productivity growth here in the United States over the past half century.

First came the productivity growth slowdown proper: If you had, forty-five years ago, asked a then appallingly young Martin Baily how prosperous the U.S. would be in 2025, he would then have bet that GDP per capita in 2025 would $125,000 in 2009-value dollars. The productivity slowdown that began after 1973 pushed that estimate down to $80,000 2009-value dollars of per capita GDP as of 2025. That is the forecast that Martin would have made–did make–throughout the 1980s and well into the 1990s.

Second came the information age growth spurt of 1995-2004: It looked like a return to the pre-1973 old normal in productivity growth driven by the technological revolution in information and communication technology. We hoped that it was a permanent shift. It turned out to be a one-time blip: first up, then down.

Third came 2008. After 2008, we are no longer expecting $80,000 of 2009-value dollars of per capita GDP in 2025. We are expecting only $63,000. This is a second big jump down, one very closely tied to what happened in 2008, and one of remarkably large magnitude given that come 2025 it will have had less than two decades to cumulate and compound.

These are three–four if you want to distinguish the bounce-up in 1995 from the bounce-down in 2004–different phenomena. They need to be analyzed separately and distinctly.

Consider 2008: We ought to have had a substantial recovery back to the pre-2008 trend after the 2008-2009 crisis. We did not. (Bob Barro will talk a bunch about that anomalous surprise later on.) I merely want to stress now that our failure to see a true and proper recovery back toward if not to the pre-financial crisis trend is not because our economy has become sclerotic. It is not because the economy has lost its ability to reallocate resources to more productive uses as a result of market price signals. Consider the period 2005-2008. The economy reallocated resources fine from 2005-2008 away from housing and into exports, investment, and other categories. It did so financial markets changed their views of the housing sector. As their views of the housing sector changed, they sent different price signals to the real economy. And businesses responded to incentives on a truly remarkable and massive level in an astonishingly smooth way. Housing construction sat down. Business investment and exports stood up. And it all happened without a recession.

Then with what happened in 2008 came the big problem. The financial crisis created a low-pressure high-unemployment economy. After 2008 we hit the zero lower bound on interest rates. Optimism about how effective Federal Reserve quantitative easing and forward guidance polices could be turned out to be wrong.

Then we hit the economy on the head with the fiscal-austerity brick—mostly at the state and local level, but at the federal level as well. We hit it on the head over and over again. With interest rates at zero, the Federal Reserve finds no way to signal exports and business investment that they really should be doing more, and should be taking up the slack from fiscal austerity that was caused by hitting the economy on the head with the fiscal-austerity brick over and over again.

Moreover, we did nothing to restructure housing finance to assist peoples cared and panicked after the housing crash and living in their sisters’ basements from forming households of their own, and moving out.

And productivity growth collapsed and has stayed collapsed.

Why? I find myself very impressed with analyses like those of Steve Davis and Till von Wächter, of Gabe Chodorow-Reich and Johannes Weiland, and of many others. They say that it really matters for the process of creative destruction and reallocation whether it takes places in a high- or a low-pressure economy. Caught up in a mass layoff–something that is clearly in no way a signal of your skill level, productivity, or work ethic–when unemployment is low? You lose maybe 5% of your income over the next 20 years. Caught up in a mass layoff when unemployment is high? Your loss is more like 20% of your income over the next 20 years. “Employment flexibility” has very different consequences for long-run productivity growth depending on whether that flexibility leads you to move to a higher-productivity job or to unemployment or out of the labor force altogether. These macro-micro linkages are very clear in the labor literature. They seem barely noticed in the productivity literature.

Can we still recover from this post-2008 disaster?

First, I think we need to stop calling it the “Great Recession”. It will soon be the “Longer Depression”–longer than the Great Depression. It already is in Europe. Can we recover?:

Back in 2009 I would have said: yes, we will recover easily
Right here in 2012 Larry Summers and I said we could recover straightforwardly–but only with the right policies.
Now? There are still people like Gerry Friedman who are very optimistic, who say that we could, and that it would be if not easy at least straightforward. I am not arguing with Gerry Friedman until November 15th. I will argue with him then.

Aside from striving for a high-pressure economy and hoping that Gerry Friedman is right–which Martin did recommend–what can we do?

There is no reason why reversing the poorly-understood factors that generated the first 1973 slowdown and that turned 1995-2004 into a temporary blip rather than a permanent shift should be the highest priority when we seek for policies to boost productivity. We should, instead, look for low-hanging fruit. What is the low-hanging fruit here?

I would focus on our value-subtracting industries:

In finance we now pay some 8% of GDP—2% of asset value per year on an asset base equal to 4 times annual GDP. We used to 3% of GDP —1% and change of asset value a year for assets equal to 2.5 annual GDP. It does not seem to me that our corporate control or our allocation of investment is any better now than it was then. Certainly people now are trading against themselves more, and thus exerting a lot more price pressure against themselves. They are making the princes of Wall Street rich. Is there any increase in properly-measured real useful financial services that we are buying for this extra 5% of GDP? Paul Volcker does not think so. And I agree.
In health care administration we now pay another excess 5% of GDP. Our doctors, nurses, and pharmacists do wonderful things. But as Princeton’s Uwe Reinhart likes to say, you do the accounting and our health care administrators are about one-eighth as productive as German administrators. Why? Because they’re all working against each other. Half are trying to get insurance companies to pay bills. The other half are trying to find reasons why this particular set of bills should not be paid by the insurance company. Do any of you understand your health insurance EOB—Explanations of Benefits? If so, I congratulate you! Or, rather, I do not congratulate you: I there’s something psychologically wrong with you if you do understand them.
Mass incarceration—add up the effects on human capital and find another 2% of GDP that other countries do not pay that we are spending for, as best as I can see, no net value whatsoever.
The bet that we have made over and over again over the past 35 years that what the economy really needs is lower taxes on the rich. Elite conspicuous consumption is, by definition, not a source of social welfare–it is utility for the rich extracted by spite from the rest. It shows up in GDP as a plus. It does not show up as a plus in any even half-plausible societal well-being calculation.
NIMBYism. At this conference we have talked a little bit about occupational NIMBYism. It may be a big factor—I am not convinced, but I also am not unconvinced. But there is more. As Bronwyn said yesterday, anyone who lives in San Francisco or D.C. or Boston has got to be very impressed with residential and land-use NIMBYism as a major factor. But our judgment that land-use NIMBYism is an important factor may just be the myopia of where we Route 128 and Silicon Valley people have to live.

In my remaining time, I wish to echo what Bronwyn was saying: We need to more attention to the government’s regulation and management of research and development. We have a world that is increasingly non-Smithian, in terms of what we make and where value comes from. Yet our government seems increasingly confined to four roles: a military, a social insurance company, a protector of property rights—especially of stringent and quite probably counterproductive at the margin intellectual property rights—and an enforcer of contracts. It seems, increasingly, on autopilot with respect to other things. That cannot be healthy at all.

INTERRUPTION: “You didn’t use the words ‘public investment’ once.”

I thought you would. (Laughter)

I did include an allusion to Larry Summers’s and my paper that we gave in this space back in 2012. I hereby incorporate that entire paper by reference in my revised and extended remarks.

Extra Slides:

Correct Predictions and the Status of Economists: Hoisted from the Archives from Three Years Ago

Posted on August 14, 2016 by Brad DeLong

Bradford delong com Grasping Reality with the Invisible Hand

Brad DeLong (2013): Correct Predictions and the Status of Economists:

Paul Krugman is certainly right that history has judged… for James Tobin over Milton Friedman. There is not even a smudge left where Friedman’s approach to a monetary theory of nominal income determination once stood….

Robert Waldmann points out, repeatedly and correctly, that there is nothing theoretically in Friedman (1967) that is not in Samuelson and Solow (1960)–that inflation above expectations might deanchor future inflation was not something Friedman (or Phelps) thought up, and that neither Friedman (nor Phelps) was thinking that high unemployment might deanchor the NAIRU. And Paul Krugman points out that the vertical long-run Phillips Curve of Friedman (and Phelps) is simply wrong at low rates of inflation, and so not helpful as a fundamental tool.

There is, however, one big thing Friedman got right: to stand up on his hind legs and say: ‘Expectations of inflation are becoming deanchored right now. The accelerationist mechanism is the mechanism that is going to dominate business cycle dynamics in both the short-term and the medium-term.’ That was right. And that was a powerful source of manna.

Similarly, or perhaps not, I would argue that there is one big thing (along with a large number of medium things and small things) that Paul Krugman got right: his prediction back in 1998 of The Return of Depression of Economics. Yet somehow Uncle Paul has not gained a similar amount of manna to what Uncle Milton gained in the late 1960s…

UPDATED 2016: And I note that Larry Summers has a similar extremely large important macroeconomic empirical hit with his predictions half a decade ago that not just “depression economics” but secular stagnation was something that we need to take very seriously indeed. I’m watching to see what the community makes of this…

Must-Watch: Robert Skidelsky et al.: Too Much Maths, Too Little History: The Problem of Economics

Posted on July 15, 2016 by Brad DeLong

Must-Watch: Robert Skidelsky et al.: Too Much Maths, Too Little History: The Problem of Economics: “The debate hosted by the LSE Economic History Department…

…in collaboration with the LSESU Economic History Society and the LSESU Economics Society. . Speakers: Lord Robert Skidelsky & Dr. Ha-Joon Chang; Prof. Steve Pisckhe & Prof. Francesco Caselli. Chair – Professor James Foreman-Peck:

The LSE is currently the only institution to have a separate EH department. We want to encourage students and academics alike to rethink the methodologies used to explain how our world works.

Do we use the theoretical and econometrical method to create models with assumptions to distil the complexities of human nature and produce measurable results? Or do we use the historical process of considering all factors to provide a more holistic explanation? More importantly, which method should be adopted to better understand increasingly complex economic phenomena in the future?

We are striving to provide our students breadth that exceeds their current theoretical studies. Hence, whilst we recognise the importance of economic history in allowing us to become closer to the truth and produce more intricate portrayal of events, the significance of models and mathematics remains to be emphasised.

Indeed, we wish to have this controversially named debate in order to both highlight the tension between the two disciplines and to produce a more nuanced overview in defence of the future of Economics.

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