Tag: Macroeconomics

Must-read: Ben Spielberg: “How to Prepare for the Next Recession”

Posted on by Brad DeLong

Must-Read: Ben Spielberg: How to Prepare for the Next Recession: “Because interest rates are already so low…

…the Fed’s principal ammunition–the ability to further lower rates–is unlikely to have much traction when the next downturn rolls around. If we want to mitigate hardship and help the economy get back on its feet when that happens, the prudent move would be to strengthen the ‘automatic stabilizers’ in the federal budget–programs like unemployment insurance, the Supplemental Nutrition Assistance Program, or SNAP (food stamps) and Medicaid–that, without the need for congressional action, expand when the economy is weak and contract when the economy is on its way to recovery…. As they currently stand, these programs aren’t enough…. One of the biggest challenges during a recession is at the state level–many states have balanced-budget requirements, which mean that as tax revenues drop, spending has to as well, making the recession more painful…. Policy makers from both major political parties recognize the risks of inaction; Congress passed stimulus packages under the administrations of both George W. Bush and President Obama. In addition to increasing SNAP benefits, providing states with fiscal relief and enacting a Homelessness Prevention and Rapid Rehousing Program that served over one million people, the Obama stimulus funded about 260,000 subsidized jobs in 2009 and 2010. But it would be risky to depend on the same wisdom to come through in the next crisis…

Whose are the ruling macroeconomic ideas?

Posted on by Brad DeLong

It is now six years since Olivier Blanchard called for “outlining the contours of a new macroeconomic policy framework”. Yet what is that framework? Where is it? Who outlines it? And what processes will give it political traction?

Looking back to 2010:

Olivier Blanchard et al. (2010): Rethinking Macro Policy: “The global crisis forced economic policymakers…

…to react in ways not anticipated by the pre-crisis consensus…. Here the IMF’s chief economist and colleagues (i) review the main elements of the pre-crisis consensus, (ii) identify the elements which turned out to be wrong, and (iii) take a tentative first pass at outlining the contours of a new macroeconomic policy framework…

You can argue that the elements of such a framework are there. But they are disassembled, lying on the ground, disconnected. And as far as political traction, they are next to nowhere.

I am ending my invited lectures these days with this:

It is traditional to close lectures like this with Keynes’s “madmen in authority” quote:

Is the fulfilment of these ideas a visionary hope? Have they insufficient roots in the motives which govern the evolution of political society? Are the interests which they will thwart stronger and more obvious than those which they will serve?

I do not attempt an answer in this place…. But if the ideas are correct… it would be a mistake, I predict, to dispute their potency over a period of time…. The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas….

There are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

Yet when I look around, I see lots of ideas with a potency that is extremely great but with influence that is nowheresville.

The ruling ideas are not those of “academic scribblers”. They are, rather, much simpler. At the moment I count five:

  1. The bankers have us by the plums…: Thus it is important to cosset, coddle, and enrich our bankers, because only if they are confident will the engine of financial intermediation that is the only thing that can create a booming full-employment economy run smoothly.

  2. Debt is bad (except when it is used to fund tax cuts for “job creators”)…: Hence it is important to cut Social Security and make sure that not an extra drop is spent on public infrastructure.

  3. Today’s extremely low interest rates must be unnatural…: Hence they need to be reversed and monetary policy “normalized” as quickly as normalization can be accomplished without renewed recession.

  4. Only pain can drive reform…: Hence boosting employment and restoring fast growth would be bad as it would impeded the essential process of actually undertaking the badly-needed “structural reforms”.

  5. We couldn’t have done any better…: The most urgent economic problems of the North Atlantic aren’t the standard ones of too-little “money” (of various kinds) chasing a normal amount of goods, but are complicated and irresolvable.

If the ruling ideas were those of Bagehot, Kindleberger, Keynes, Friedman–even a Hayek–we could do something, although in the last case it would take a lot of intellectual ingenuity to make a silk purse out of that particular sow’s ear. But the ruling ideas are barely ideas–they are, rather slogans. The bipartisan technocratic policy center of politicians who listen to arguments about what policies might actually work is gone–or at least paralyzed. And too many key levers of power are held by a right–in Germany, in Britain, and in the U.S.–that appears profoundly uninterested in argument abut policy effectiveness, if not uninterested in policy effectiveness itself.

Must-read: Olivier Blanchard: “Rethinking Macro Policy”

Posted on by Brad DeLong

Must-Read: It is now six years since Olivier Blanchard called for “outlining the contours of a new macroeconomic policy framework”. Yet what is that framework? Where is it? Who outlines it? And what processes will give it political traction?

Olivier Blanchard et al. (2010): Rethinking Macro Policy: “The global crisis forced economic policymakers…

…to react in ways not anticipated by the pre-crisis consensus…. Here the IMF’s chief economist and colleagues (i) review the main elements of the pre-crisis consensus, (ii) identify the elements which turned out to be wrong, and (iii) take a tentative first pass at outlining the contours of a new macroeconomic policy framework.

Must-read: Jim Tankersley: “The world has too many workers. Here’s one way to fix it”

Posted on by Brad DeLong

Must-Read:I really do not like the “too many workers” framing: I vastly prefer either:

  • Too little public investment
  • Too little government purchases
  • Too little government debt
  • Too little risk-bearing capacity
  • Too little in the way of safe assets for savers to hold

But the argument seems 100% right to me:

Jim Tankersley: The world has too many workers. Here’s one way to fix it: “overcomplicating America’s economic challenges today…

…Maybe the problem is simple: too many workers. That is the argument made in a new paper released by the centrist Democratic think tank Third Way, which theorizes that the world economy is suffering from an oversupply of labor and too little demand for the goods and services those workers produce…. Daniel Alpert… [makes] Third Way’s latest effort to shape the liberal policy conversation in the 2016 presidential primaries. It does so in decidedly un-centrist fashion — by embracing a larger infrastructure spending program than Bernie Sanders does….

Alpert laments the ‘suddenness and extent of the integration of over 3 billion people into a global capitalist market, that really only hitherto consisted of about 800 million in the advanced economies.’ He argues that worker influx has triggered a wave of low-wage job creation in America. He notes that nearly half of the jobs created in the current recovery have come in traditionally low-wage sectors…. Intervening, he says, requires a ‘bold change in policy focus’ for the United States. Which is to say, a $1.2 trillion infrastructure spending program, at a time when Congress remains dead set against big new spending plans. Alpert estimates it would create 5.5 million jobs….

It might seem an unusual position for a centrist think-tank, outflanking the most liberal presidential candidate on the left. But Third Way officials argue it’s an economic imperative. ‘Whether it’s through some sort of spending deal, where you’re getting more money into infrastructure, or repatriation or some other means, you have to get this done’ in Congress, said Jim Kessler, the group’s senior vice president for policy. ‘That glut of worldwide labor is not going to go away, magically.’

Live at Project Syndicate: “Rescue Helicopters for Stranded Economies”

Posted on by Brad DeLong

Live at Project Syndicate: Rescue Helicopters for Stranded Economies: BERKELEY – For countries where nominal interest rates are at or near zero, fiscal stimulus should be a no-brainer…. Some point to the risk that, once the economy recovers and interest rates rise, governments will fail to make the appropriate adjustments to fiscal policy. But… governments that wish to pursue bad policies will do so no matter what decisions are made today…. Aversion to fiscal expansion reflects raw ideology, not pragmatic considerations…. This debate is no longer an intellectual discussion–if it ever was. As a result, a flanking move might be required. It is time for central banks to assume responsibility and implement ‘helicopter money’… **Read MOAR at Project Syndicate

Must-read: David Glasner: “What’s Wrong with Monetarism?”

Posted on by Brad DeLong

Must-Read: An excellent read from the very sharp David Glasner. I, however, disagree with the conclusion: the standard reaction of most economists to empirical failure is to save the phenomena and add another epicycle. Why not do that in this case too? Why not, as someone claimed to me that John Taylor once said, stabilize nominal GDP by passing a law mandating the Federal Reserve keep velocity-adjusted money growing at a constant rate?

David Glasner: What’s Wrong with Monetarism?: “DeLong balanced his enthusiasm for Friedman with a bow toward Keynes…

…noting the influence of Keynes on both classic and political monetarism, arguing that, unlike earlier adherents of the quantity theory, Friedman believed that a passive monetary policy was not the appropriate policy stance during the Great Depression; Friedman famously held the Fed responsible for the depth and duration of what he called the Great Contraction… in sharp contrast to hard-core laissez-faire opponents of Fed policy, who regarded even the mild and largely ineffectual steps taken by the Fed… as illegitimate interventionism to obstruct the salutary liquidation of bad investments, thereby postponing the necessary reallocation of real resources to more valuable uses…. But both agreed that there was no structural reason why stimulus would necessarily counterproductive; both rejected the idea that only if the increased output generated during the recovery was of a particular composition would recovery be sustainable. Indeed, that’s why Friedman has always been regarded with suspicion by laissez-faire dogmatists who correctly judged him to be soft in his criticism of Keynesian doctrines….

Friedman parried such attacks… [saying that] the point of a gold standard… was that it makes it costly to increase the quantity of money. That might once have been true, but advances in banking technology eventually made it easy for banks to increase the quantity of money without any increase in the quantity of gold… True, eventuaally the inflation would have to be reversed to maintain the gold standard, but that simply made alternative periods of boom and bust inevitable…. If the point of a gold standard is to prevent the quantity of money from growing excessively, then, why not just eliminate the middleman, and simply establish a monetary rule constraining the growth in the quantity of money? That was why Friedman believed that his k-percent rule… trumped the gold standard….

For at least a decade and a half after his refutation of the structural Phillips Curve, demonstrating its dangers as a guide to policy making, Friedman continued treating the money multiplier as if it were a deep structural variable, leading to the Monetarist forecasting debacle of the 1980s…. So once the k-percent rule collapsed under an avalanche of contradictory evidence, the Monetarist alternative to the gold standard that Friedman had persuasively, though fallaciously, argued was, on strictly libertarian grounds, preferable to the gold standard, the gold standard once again became the default position of laissez faire dogmatists…. So while I agree with DeLong and Krugman (and for that matter with his many laissez-faire dogmatist critics) that Friedman had Keynesian inclinations which, depending on his audience, he sometimes emphasized, and sometimes suppressed, the most important reason that he was unable to retain his hold on right-wing monetary-economics thinking is that his key monetary-policy proposal–the k-percent rule–was empirically demolished in a failure even more embarrassing than the stagflation failure of Keynesian economics. With the k-percent rule no longer available as an alternative, what’s a right-wing ideologue to do? Anyone for nominal gross domestic product level targeting (or NGDPLT for short)?

Memo to self: Monetary policy since 1985

Posted on by Brad DeLong
FRED Graph FRED St Louis Fed

Major Federal Reserve Policy Moves since 1985:

The Federal Reserve overshoots and overtightens. But the effect on the economy is diminished because more-responsible fiscal policy leads to a fall in the term and risk premiums:

Preview of Pounding Nails in Nevada

The Federal Reserve eases monetary policy to fight the recession and jobless recovery caused by its previous overshoot:

Preview of Pounding Nails in Nevada

The Federal Reserve tightens to–successfully–try to keep inflation from rising; the first bond market “conundrum” as the endogenous duration of mortgage-backed securities produces a much tighter-than-expected gearing between the short-term safe nominal interest rate i and the long-term risky real interest rate r:

Preview of Pounding Nails in Nevada

The Federal Reserve loosens during the international financial crisis of 1998:

Preview of Pounding Nails in Nevada

The Federal Reserve tightens to try to prevent “overheating” in the late stages of the dot-com boom:

Preview of Pounding Nails in Nevada

The Federal Reserve loosens to fight the recession brought on by the collapse of the dot-com boom:

Preview of Pounding Nails in Nevada

The Federal Reserve keeps policy stimulative and delays its interest-rate tightening cycle given the weakness of the recovery; the bond market first does not and then does credit the Federal Reserve’s statements:

Preview of Pounding Nails in Nevada

The Federal Reserve eases as the magnitude of the subprime-driven financial crisis becomes apparent; but the collapse in financial market trust and the financial crisis come anyway:

Preview of Pounding Nails in Nevada

With the recovery inadequate, the Federal Reserve decides to extend the period of emergency stimulative extraordinary monetary policy–but the long-term risky real interest rate r sticks at 3%, and does not go any lower:

Preview of Pounding Nails in Nevada

With the unemployment rate now in the range associated with full employment, the Federal Reserve decides that it is time to “normalize” interest rates:

Preview of Pounding Nails in Nevada

Inflation Control:

The Federal Reserve has overdone it on inflation control–successfully kept inflation from getting “too high”, and in fact pushed inflation “too low”:

Graph Consumer Price Index for All Urban Consumers All Items Less Food and Energy FRED St Louis Fed

Full Employment:

Before 2008, macroeconomic stabilization performance on full employment was quite good. 2008-2010 was a disaster. How we evaluate what follows depends on whether we look at unemployment or employment:

Graph Consumer Price Index for All Urban Consumers All Items Less Food and Energy FRED St Louis Fed Graph Consumer Price Index for All Urban Consumers All Items Less Food and Energy FRED St Louis Fed

Structural Adjustment: “Pounding Nails in Nevada…”

Was a recession in 2009 any sense “needed” to move people out of construction employment as the housing boom collapsed? Was a rise in unemployment a necessary first step in rebalancing the late-2000s economy?

No: Look at the key components of aggregate demand:

FRED Graph FRED St Louis Fed

As of November 2008, when John Cochrane gave his “we should have a recession… people who spend their lives pounding nails in Nevada need something else to do…” keynote address to the 2008 CRSP Forum, residential investment had already fallen by 3.5%-points of GDP and was within 0.5%-points of what had been its nadir. The recession came after the move of labor out of construction had been all but completely finished:

FRED Graph FRED St Louis Fed

*If you were going to say “we should have a recession” on the grounds that a recession was a necessary part of the structural adjustment required to climb down from overinvetment in housing, the moment to have said that was 2005. And those who said that then were wrong: we did not read a recession in order to move those “pounding nails in Nevada” into other sectors while keeping them employed…

Must-read: Mark Muro: “Adjusting to Economic Shocks Tougher”

Posted on by Brad DeLong

Must-Read: I gotta go back and reread Blanchard and Katz on regional adjustment in the early 1992. How much of it is that adjustment is faster? How much of it is that the shock they study–to LA-sector aerospace employment–was different? How much of it is that back then aggregate demand policy was supportive of adjustment?

Mark Muro: Adjusting to Economic Shocks Tougher: “In the last six months a burst of new empirical work…

…much of it focused on the region-by-region aftermath of the Great Recession—is shredding key aspects of the standard view and suggesting a much tougher path to adjustment for people and places…. Joe Parilla and Amy Liu, David Autor, David Dorn, and Gordon Hanson focus on the ‘stunningly slow’ adjustment of exposed local labor markets to the ‘China shock’ and argue that the story challenges ‘much of the received empirical wisdom about how labor markets adjust to trade shocks.’

Autor and his colleagues do not see much evidence at all of a frictionless labor market in which the rapid mobility of workers across firms, industries, and regions guarantees rapid adjustment to new realities. Instead they see a series of slow-moving crises in particular metro areas. ‘Switching costs’ and other frictions inhibit workers’ ability to shift quickly to new, less-threatened firms or industries.  Many workers never recoup lost earnings and depend more on transfer payments. Little offsetting growth is detected in industries not exposed to the shock…

Must-read: James Kwak: “Profits in Finance”

Posted on by Brad DeLong

Must-Read: It used to be that we collectively paid Wall Street 1% per year of asset value–which was then some 3 years’ worth of GDP–to manage our investment and payments systems. Now we pay it more like 2% per year of asset value, which is now some 4 years’ worth of GDP. My guess is that, at a behavioral finance level, people “see” commissions but do not see either fees or price pressure effects.

Plus there is the cowboy-finance-creates-unmanageable-systemic-risk factor, plus the corporate-investment-banks-have-no-real-risk-managers factor. We are paying a very heavy price indeed for having disrupted our peculiarly regulated and oligopoly-ridden post-Great Depression New Deal financial system:

James Kwak: Profits in Finance: “Expense ratios on actively managed mutual funds have remained stubbornly high…

…Even though more people switch into index funds every year, their overall market share is still low—about $2 trillion out of a total of $18 trillion in U.S. mutual funds and ETFs. Actively managed stock mutual funds still have a weighted-average expense ratio of 86 basis points. Why do people pay 86 basis points for a product that is likely to trail the market, when they could pay 5 basis points for one that will track the market (with a $10,000 minimum investment)? It’s probably because they think the more expensive fund is better. This is a natural thing to believe. In most sectors of the economy, price does correlate with quality, albeit imperfectly…. And this is one area where I think marketing does have a major impact, both in the form of ordinary advertising and in the form of the propaganda you get with your 401(k) plan…. The persistence of high fees is partly due to the difficulty of convincing people that markets are nearly efficient and that most benchmark-beating returns are some product of (a) taking on more risk than the benchmark, (b) survivor bias, and (c) dumb luck.

Must-read: Paul Krugman: “In Hamilton’s Debt”

Posted on by Brad DeLong

Must-Read: Paul Krugman: In Hamilton’s Debt: “Hamilton’s pathbreaking economic policy manifestoes…

…his 1790 ‘First Report on the Public Credit’… remains amazingly relevant today…. Why did Hamilton want to take on those state debts? Partly to establish a national reputation as a reliable borrower… give wealthy, influential investors a stake in the new federal government…. Beyond that, however, Hamilton argued that the existence of a significant, indeed fairly large national debt would be good for business. Why? Because:

in countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money.

That is, bonds issued by the U.S. government would provide a safe, easily traded asset that the private sector could use as a store of value, as collateral for deals, and in general as a lubricant for business activity. As a result, the debt would become a ‘national blessing’…. This argument anticipates, to a remarkable degree, one of the hottest ideas in modern macroeconomics: the notion that we are suffering from a global ‘safe asset shortage.’ The private sector, according to this argument, can’t function well without a sufficient pool of assets whose value isn’t in question–and for a variety of reasons, there just aren’t enough such assets these days. As a result, investors have been bidding up the prices of government debt, leading to incredibly low interest rates. But it would be better for almost everyone, the story goes, if governments were to issue more debt, investing the proceeds in much-needed infrastructure even while providing the private sector with the collateral it needs to function. And it’s a very persuasive story to just about everyone who has looked hard at the evidence.

Unfortunately, policy makers won’t do the right thing, largely because they keep listening to fiscal scolds…. Alexander Hamilton knew better. Unfortunately, Hamilton isn’t around to help counter foolish debt phobia. But maybe reminding policy makers of his wisdom is one way to chip away at the wall of folly that still constrains policy. And having his face out there every time someone pulls out a ten can’t hurt, either.