Macroeconomics Archives

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.

The Three Ways in Which the Post-Korean War Federal Reserve Reacts to/Leads Large Increases in the Unemployment Rate

Posted on October 19, 2016 by Brad DeLong

In “Eisenhower” episodes, the Federal Reserve cuts interest rates slowly and shallowly as the unemployment rises, trusting to the equilibrium-restoring self-stabilizing forces of the economy. It then raises interest rates as the economy recovers.

In “murder” episodes, the Federal Reserve kills the expansion in order to fight inflation. Interest rates start high when the unemployment rate starts rising, the Fed then cuts interest rates far and quickly as unemployment approaches its peak, after which it raises interest rates as the economy recovers.

In “financial crisis” episodes, a financial crisis (S&L 1990; dot-com 2000) sends the unemployment rate up, in response the Federal Reserve cuts interest rates substantially, and then raises them as the economy recovers.

Of course, post-2007 fits none of these patterns because of the zero lower bound…

2016 10 04 Unemployment and Fed Funds Changes numbers

DRAFT: Did Macroeconomic Policy Play a Different Role in the (Post-2009) Recovery?

Posted on October 14, 2016 by Brad DeLong

Federal reserve bank of boston Google Search

J. Bradford DeLong
U.C. Berkeley
October 15, 2016

Federal Reserve Bank of Boston
60th Economic Conference
The Elusive “Great” Recovery: Causes and Implications for Future Business Cycle Dynamics

Abstract: How has macroeconomic policy been different in this recovery? In banking and regulatory policy, it has been distinguished from earlier patterns—or from what we thought earlier patterns implied for a shock this large and this persistent—in a relative unwillingness to apply the “penalty rate” part of the Bagehot Rule and in a slowness to restructure housing finance that are, for me at least, different than I had expected. In fiscal policy, the prolonged reign of austerity in an environment in which both classical and Keynesian principles suggest that it is time to run up the debt is surprising and unexpected, to me at least. In monetary policy it is more difficult to say what has been different and surprising in this recovery. There have been so many aspects of monetary policy and our expectations of what policy would be during a prolonged excursion to the zero lower bound that it is hard enough merely to say what monetary policy has been, and too much to ask how it has been different from whatever baseline view of what the policy rule would be that we ought to have held back in 2008.

Misdiagnosis of 2008 and the Fed: Inflation Targeting Was Not the Problem. An Unwillingness to Vaporize Asset Values Was Not the Problem…

Posted on October 3, 2016October 3, 2016 by Brad DeLong

This, from the very sharp Martin Wolf, seems to me to go substantially awry when Martin writes the word “convincingly”. Targeting inflation is not easy: you don’t see what the effects of today’s policies are on inflation until two years or more have passed. Targeting asset prices, by contrast, is very easy indeed: you buy and sell assets until their prices are what you want them to be.

As I have said before, as of that date January 28, 2004, at which Mallaby claims that Greenspan knew that he ought to “vaporise citizens’ savings by forcing down [housing] asset prices” but had “a reluctance to act forcefully”, that was not Greenspan’s thinking at all. Greenspan’s thinking, in increasing order of importance, was:

Least important: that he would take political heat if the Fed tried to get in the way of or even warned about willing borrowers and willing lenders contracting to buy houses and to take out and issue mortgages.
Less important: a Randite belief that it was not the Federal Reserve’s business to protect rich investors from the consequences of their own imprudent folly.
Somewhat important: a lack of confidence that housing prices were, in fact, about fundamentals except in small and isolated markets.
Of overwhelming importance: a belief that the Federal Reserve had the power and the tools to build firewalls to keep whatever disorder finance threw up from having serious consequences for the real economy of demand, production, and employment.

(1) would not have kept Greenspan from acting had the other more important considerations weighed in the other direction: Greenspan was no coward. William McChesney Martin had laid down the marker that: “If the System should lose its independence in the process of fighting for sound money, that would indeed be a great feather in its cap and ultimately its success would be great…” Preserving your independence by preemptively sacrificing it when it needed to be exercised was not Greenspan’s business. (2) was, I think, an error–but not a major one. And on (3), Greenspan was not wrong:

S P Case Shiller 20 City Composite Home Price Index© FRED St Louis Fed

Nationwide, housing prices today are 25% higher than they were at the start of 2004. There is no fundamental yardstick according to which housing values then needed to be “vaporized”. The housing bubble was an issue for 2005-6, not as of the start of 2004.

It was (4) that was the misjudgment. And the misjudgment was not that the economy could not handle the adjustment that would follow from the return of housing values from a stratospheric bubble to fundamentals. The economy handled that return fine: from late 2005 into 2008 housing construction slackened, but exports and business investment picked up the slack, and full employment was maintained:

Macroeconomic Overview Talk for UMKC MBA Students April 1 2013 DeLong Long Form

The problem was not that the economy could not climb down from a situation of irrationally exuberant and elevated asset prices without a major recession. The problem lay in the fact that the major money center banks were using derivatives not to lay subprime mortgage risk off onto the broad risk bearing capacity of the market, but rather to concentrate it in their own highly leveraged balance sheets. The fatal misjudgment on Greenspan’s part was his belief that because the high executives at money center banks had every financial incentive to understand their derivatives books that they in fact understood their derivatives books.

As Axel Weber remarked, afterwards:

I asked the typical macro question: who are the twenty biggest suppliers of securitization products, and who are the twenty biggest buyers. I got a paper, and they were both the same set of institutions…. The industry was not aware at the time that while its treasury department was reporting that it bought all these products its credit department was reporting that it had sold off all the risk because they had securitized them…

That elite money center financial vulnerability and the 2008 collapse of that Wall Street house of cards, not the unwinding of the housing bubble, was what produced the late 2008-2009 catastrophe:

Greenspan’s error was not in targeting inflation (except at what in retrospect appears to be too low a level). Greenspan’s error was not in failing to anticipatorily vaporize asset values (though more talk warning potentially overleveraged homeowners of risks would have been a great mitzvah for them). Greenspan’s error was in failing to regulate and supervise.

Martin Wolf: Man in the Dock:

Of his time as Fed chairman, Mr Mallaby argues convincingly that:

The tragedy of Greenspan’s tenure is that he did not pursue his fear of finance far enough: he decided that targeting inflation was seductively easy, whereas targeting asset prices was hard; he did not like to confront the climate of opinion, which was willing to grant that central banks had a duty to fight inflation, but not that they should vaporise citizens’ savings by forcing down asset prices. It was a tragedy that grew out of the mix of qualities that had defined Greenspan throughout his public life—intellectual honesty on the one hand, a reluctance to act forcefully on the other.

Many will contrast Mr Greenspan’s malleability with the obduracy of his predecessor, Paul Volcker, who crushed inflation in the 1980s. Mr Greenspan lacked Mr Volcker’s moral courage. Yet one of the reasons why Mr Greenspan became Fed chairman was that the Reagan administration wanted to get rid of Mr Volcker, who “continued to believe that the alleged advantages of financial modernisation paled next to the risks of financial hubris.”

Mr Volcker was right. But Mr Greenspan survived so long because he knew which battles he could not win. Without this flexibility, he would not have kept his position. The independence of central bankers is always qualified. Nevertheless, Mr Greenspan had the intellectual and moral authority to do more. He admitted to Congress in 2008 that: “I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.” This “flaw” in his reasoning had long been evident. He knew the government and the Fed had put a safety net under the financial system. He could not assume financiers would be prudent.

Yet Mr Greenspan also held a fear and a hope. His fear was that participants in the financial game would always be too far ahead of the government’s referees and that the regulators would always fail. His hope was that “when risk management did fail, the Fed would clean up afterwards.” Unfortunately, after the big crisis, in 2007-08, this no longer proved true.

If Mr Mallaby faults Mr Greenspan for inertia on regulation, he is no less critical of the inflation-targeting that Mr Greenspan ultimately adopted, albeit without proclaiming this objective at all clearly. The advantage of inflation-targeting was that it provided an anchor for monetary policy, which had been lost with the collapse of the dollar’s link to gold in 1971 followed by that of monetary targeting. Yet experience has since shown that monetary policy is as likely to lead to instability with such an anchor as without one. Stable inflation does not guarantee economic stability and, quite possibly, the opposite.

Perhaps the biggest lesson of Mr Greenspan’s slide from being the “maestro” of the 1990s to the scapegoat of today is that the forces generating monetary and financial instability are immensely powerful. That is partly because we do not really know how to control them. It is also because we do not really want to control them. Readers of this book will surely conclude that it is only a matter of time before similar mistakes occur.

The root problem of 2008 was not that inflation targeting generates instability (even though a higher inflation target then and now would have been very helpful). The root problem of 2008 was not that the Federal Reserve was unwilling to vaporize asset values–the Federal Reserve vaporized asset values in 1982, and stood willing to do so again *if it were to seem appropriate*. The root problem of 2008 was a failure to recognize that the highly leveraged money center banks had used derivatives not to distribute subprime mortgage risk to the broad risk bearing capacity of the market as a whole but, rather, to concentrate it in themselves.

At least as I read Mallaby, he does not criticize Greenspan for “inertia on regulation” nearly as much as he does for Greenspan’s failure to “vaporise citizens’ savings by forcing down asset prices…” even when there is no evidence of rising inflation expectations or excess demand in the goods and labor markets as a whole.

Axel Weber’s full comment:

I think one of the things that really struck me was that, in Davos, I was invited to a group of banks–now Deutsche Bundesbank is frequently mixed up in invitations with Deutsche Bank.

I was the only central banker sitting on the panel. It was all banks. It was about securitizations. I asked my people to prepare. I asked the typical macro question: who are the twenty biggest suppliers of securitization products, and who are the twenty biggest buyers. I got a paper, and they were both the same set of institutions.

When I was at this meeting–and I really should have been at these meetings earlier–I was talking to the banks, and I said: “It looks to me that since the buyers and the sellers are the same institutions, as a system they have not diversified”. That was one of the things that struck me: that the industry was not aware at the time that while its treasury department was reporting that it bought all these products its credit department was reporting that it had sold off all the risk because they had securitized them.

What was missing–and I think that is important for the view of what could be learned in economics–is that finance and banking was too-much viewed as a microeconomic issue that could be analyzed by writing a lot of books about the details of microeconomic banking. And there was too little systemic views of banking and what the system as a whole would develop like.

The whole view of a systemic crisis was just basically locked out of the discussions and textbooks. I think that that is the one big lesson we have learned: that I now when I am on the board of a bank, I bring to that bank a view, don’t let us try to optimize the quarterly results and talk too much about our own idiosyncratic risk, let’s look at the system and try to get a better understanding of where the system is going, where the macroeconomy is going. In a way I take a central banker’s more systemic view to the institution-specific deliberations. I try to bring back the systemic view. And by and large I think that helps me understand where we should go in terms of how we manage risks and how we look at risks of the bank compared to risks of the system.

Alan Greenspan Misjudged the Risks in the Mid-2000s; Alan Greenspan Was Not a Coward

Posted on October 2, 2016 by Brad DeLong

The standard explanations I have heard for Alan Greenspan’s policy of “benign neglect” toward the mid-2000s housing bubble–why he turned down the advice of Ned Gramlich and others to use his regulatory and jawboning powers against it–see Greenspan as motivated by three considerations:

Least important: that he would take political heat if the Fed tried to get in the way of or even warned about willing borrowers and willing lenders contracting to buy houses and to take out and issue mortgages.
Less important: a Randite belief that it was not the Federal Reserve’s business to protect rich investors from the consequences of their own imprudent folly.
Of overwhelming importance: a belief that the Federal Reserve had the power and the tools to build firewalls to keep whatever disorder finance threw up from having serious consequences for the real economy of demand, production, and employment.

Back in the mid-2000s Greenspan had a strong case.

I certainly, bought it by and large. The Federal Reserve had, after all, managed to deal with the 1987 stock market crash, the 1991 S&L crash, the 1995 Mexican crash, the 1997 East Asian crisis, the 1998 dual bankruptcy of Russia and LTCM, the 2000 collapse of the dot-com bubble, and 9/11–plus assorted smaller financial disturbances. And it had dealt with them well.

Thus the interpretation of Alan Greenspan’s actions in the mid-2000s that I have always believed in is: he misjudged the risks, and unknowingly made bad calls.

Now comes Sebastian Mallaby with a different interpretation. Mallaby’s interpretation of Greenspan in the mid-2000s is: he understood the risks, but was too cowardly to do his proper job:

Sebastian Mallaby: The Doubts of Alan Greenspan:

Mr. Greenspan was not complacent about potential catastrophes lurking in balance sheets—he had worried about them for decades. Far from being ignorant of these issues, he was the man who knew….

In Jan. 2004, with house prices starting to look frothy, Mr. Greenspan repeated his warning, predicting a repeat of the tech bust. “It sounds as though we’re back in the late ’90s,” he worried to his colleagues. “The potential snap-back effects are large.” In short, Mr. Greenspan’s youthful fear of finance stayed with him throughout his Fed tenure. Long before the 2008 crisis, he had understood the lessons that were celebrated as new insights in the wake of the crash…

This seems to me to be simply wrong as an interpretation of the mid-2000s.

Here’s the context of the Greenspan quotes, from the January 28, 2004 FOMC meeting. Greenspan is building the case for removing from the FOMC post-meeting statement the phrase that it will wait a “considerable period” before it will start to raise the Fed Funds rate from its then-current level of 1%/year, and to replace that with a reference to “patience” before it will start to raise the Federal Funds rate.

Greenspan:

President Broaddus, did you have a question? Are there any other questions? If not, let me get started. I must say after listening to this roundtable discussion that I find it hard to recall a degree of buoyancy like the one that comes across today. Unless I’m mistaken, Committee members have not reported on indications of a more unequivocally benign and positive economic outlook in a number of years. It sounds as though we’re back in the late ’90s or perhaps early 2000. That, I suspect, is a reflection of what is going on in the economy. Indeed, on the basis of both the Beige Book and today’s roundtable discussion of regional developments, the data that will be forthcoming from official agencies, if my experience serves me well, are going to come in surprisingly on the upside. The outlook seems extraordinarily benign, and I’ll get to the reasons why that bothers me shortly.

Profits margins are high though they may have peaked and probably will be edging downward. At this stage the usual lag between productivity growth and its effects on real compensation is likely to result in increasing incomes and thus provide a fairly solid base for further growth in consumer spending as the impact of earlier tax cuts fades. The wealth effect, which has been a drag on spending for quite a long period of time, is now back to neutral or possibly has turned positive; and in my view, the consumer debt service burdens that one hears about from most of our private-sector colleagues are really being overstated. If we look, for example, at the debt service burden on home mortgages, we find that a very large number of homeowners have refinanced and have locked in a very low coupon rate on average. That suggests that most mortgage credit servicing payments are going to be relatively flat irrespective of what we do in the marketplace. And while we likely are looking at an increase in the consumer credit part of household indebtedness, it is mortgages, of course, that dominate the overall household sector debt.

On the business side it has already been mentioned that the financing gap has turned negative for the first time in quite a significant period, and we’re seeing the implications of an increase in cash flow on capital investment. We’re seeing it in the anecdotal information on capital appropriations and certainly in the new orders series, which are continually improving. Inventory investment has nowhere to go but up. The Institute of Supply Management reports that purchasing managers continue to view the inventories of their customers as exceptionally low. The implication is that new orders will strengthen, and we’re even hearing some discussions about a prospective pickup in commercial lending; that has not yet happened, but it would be another indication of a surge in inventory investment. The housing market is bound to soften at some point, but we’ve been saying that for quite a long period of time. In any event, it’s hard to imagine that housing activity will contribute very much in the way of strength to the expansion. Net exports will probably continue to be a small drag. Inflation clearly is stable.

I think the employment data are actually a good deal better than the latest payroll numbers suggest. If we look at the change in employment as the difference between gross hires less gross separations, the gross separation series as best we can judge is pretty much what we would expect given the GDP growth numbers that we have been looking at. Initial claims are down significantly as are job losses. What’s happening is that new hires are well below expectations in relation to economic growth, and I suspect that virtually all of that weakness is merely a mirror image of the increase in output per hour. Indeed, the question here is how much longer we can continue to get such rapid increases in output per hour. I do not deny that we may get additional quarters with 5 percent productivity growth rates, but if that goes on much longer, it will become historically unprecedented.

An economy characterized by cutting-edge technology such as in the United States does not seem capable of expanding much faster than 3 percent over the long run. Indeed, the level of intelligence is not high enough to foster appreciably faster growth over time. As I like to ask the question, why did it take so long to recognize the economic value of silicon among other things or to appreciate the desirability of reorganizing corporate structures the way businesses do now? Business firms could have done that fifty years ago, and they didn’t. The answer is that we’re just not smart enough. The reason that a lot of the emerging nations are able to sustain faster economic growth is that they are catching up. It’s not an intelligence issue. So there is something here that has to change, or we really are looking at a new trend in productivity that, as I see it, is remarkably fundamental. My impression of the employment data is that the probability of a significant upward revision in the December number or a pop in the January number is a good deal better than 50/50. And I would submit that, as of next week, we may—I say “may”—be looking at a somewhat different overall picture of the labor market.

The question that we have to ask ourselves is, What could go wrong with this extraordinary scenario, which the Board’s staff forecast extends through 2005? It involves the most extraordinary and benign economic performance that I have observed in my business lifetime. But then again all this involves a productivity world that I’ve never perceived or lived in, and it may be more real, if I may put it that way, than we imagine.

There are several developments, however, that I find worrisome. All have been mentioned in our discussion. The first is that yield spreads continue to fall. As yield spreads fall, we are in effect getting an incremental increase in risk-taking that is adding strength to the economic expansion. And when we get down to the rate levels at which everybody is reaching for yield, at some point the process stops and untoward things happen. The trouble is, we don’t know what will happen except that at these low rate levels there is a clear potential for huge declines in the prices of debt obligations such as Baa-rated or junk bonds. To put it another way, the potential snapback effects are large. We are always better off if equity premiums are moderate to slightly high or yields are moderate to slightly high because the vulnerability to substantial changes in market psychology is then obviously less. In my view we are vulnerable at this stage to fairly dramatic changes in psychology. We are undoubtedly pumping very considerable liquidity into the financial system. It is showing up in the Goldman Sachs and Citicorp indicators. We don’t see it in the money supply numbers or some other standard indicators. We’re seeing it in the asset-price structure. That structure is not yet at a point where “bubble” is the appropriate word to describe it, but asset pricing is getting to be very aggressive. I don’t know whether any of you have noticed that, while stock market prices have been rising persistently since March of last year, the rise in the last four or five weeks has been virtually straight up. That’s usually a sign that something is going to change and that the change is usually not terribly helpful.

I think we have to be wary of the possibility of a somewhat different outcome than is suggested by the model we may be looking at. The main issue here is what will happen in the event of a decline in the rate of growth in output per hour. In the context of the strength in aggregate demand that we are experiencing, we should get a big surge in employment. We should also get, as the staff forecast suggests, the first significant increases in unit labor costs. It is not price that we ought to be focusing on. It is not core PCE, although I think that’s ultimately where we’re going. The first signs of emerging trouble are likely to be in the form of increases in unit labor costs; and with profit margins currently at high levels, those increases may be absorbed for a while in weaker profit margins, which is probably not a bad forecast at this stage. But there is also a difficult question regarding what has caused the decline in inflation in recent years. It has been global and not confined to the United States, and it cannot simply be the consequence of monetary policy. I realize that a lot of people think that world monetary policy has suddenly gotten terrific and that it is the reason for the global decline in inflation. I’d love to believe that is true. I don’t believe it for four seconds. I think that what we’re looking at is, to an important extent, the consequence of a major move toward deregulation, the opening up of markets, and strong competitive forces driven in large part by technology. I don’t know how long this very significant downward pressure on prices is going to last. With regard to deregulation, I do know that the lowering of trade barriers is coming to a halt. All of the low- hanging fruit involved in trade negotiations has probably been picked, and we will be very fortunate if we can just stabilize the situation here without experiencing a rise in protectionism.

There has been a lot of discussion about the gap issue here, and I think for good reason as Ben Bernanke and Bill Poole have indicated. I might add that random walk does not mean that the inflation in 2004 is necessarily going to be the same as in 2003. That’s the expected value, but the outcome could very easily be 1½ points higher under foreseeable circumstances. What I think we have to ask ourselves is which of the various alternatives for policy can give us the most significant trouble if we are wrong. In that regard my judgment is that the expected value of inflation is in the area of its current level as far out as I can see. I also think that if we wanted to retain the “considerable period” language, we would be able to do that for a significant period of time. Indeed, I would guess that the most likely forecast of when we will have to move is not too far from when the futures market is currently anticipating that move will occur. We need to remember that we are talking very largely about a move in a tightening direction. There is a small probability that we might have to move rates lower should we suddenly run into some deflationary problems. That in my judgment is a very small probability, but it is not zero.

We are, therefore, essentially looking at the question of doing nothing or tightening. In that regard, the most costly mistake would be for us to be constrained by the “considerable period” phraseology at a time when inflationary pressures were building up fairly rapidly. If the probability that we will have to drop the “considerable period” reference is very high, which I think it is, it’s not clear to me what we gain by waiting. If, indeed, the economy is as buoyant as the discussion around this table has just described, then we are going to be pressed relatively quickly by market developments to start moving. In that event, the futures bulge now ten months out would very likely start to move closer in time. I don’t think that’s the most probable outcome, but it is a sufficiently large part of the probability tail to suggest to me that we ought to drop the “considerable period” language and adopt some reference to “patience.” The latter would in my view give us greater leeway to take action. We probably will also have to tack against the amount of liquidity that we’re pumping into the financial system. As Governor Gramlich rightly mentioned, it’s probably wise to call in the fire engines.

It’s one thing to look at the degree of liquidity after rates have been this low for this long and another to presume that the structure of the economy is going to stay this way if we continue to hold rates at this level for, say, another year and a half. So my view as far as policy is concerned is that it would not be a bad thing if we referred in some way to “patience” rather than to “considerable period” in our press statement and the markets responded in a negative way by moving up funds rate futures and long-term bond yields. Unless what I’ve heard this morning about business conditions and business sentiment is going to be dramatically reversed by the time of the next meeting, interest rates are too low. One may ask how that can be because a large number of market participants are aware of all these developments and in the past they presumably would have moved market rates higher by now. I would suggest that there is a very significant danger that they have listened to us! [Laughter] We have convinced them that the earlier simplistic view of our response to an upturn in economic growth and the associated risk of rising inflation does not apply under prevailing circumstances and will not lead us to tighten monetary policy in the near term. We have succeeded in demonstrating that such a view was now wrong. When we first argued that it was wrong, they didn’t believe us. We argued again, and they said, “Well, maybe.” We continued to argue that they were wrong, and they now believe us.

One implication in my judgment is that we can’t necessarily look, for example, at a chart showing the one-year maturity for the ten-year Treasury note nine years out, which is trading steadily at a little over 6 percent, and say that the market does not expect a rise in inflation. That may be what the numbers tell us. What I don’t know is whether that chart is based on market factors or whether I’m looking in a mirror. And I fear that it’s more the latter than the former. It is a terrific vote of confidence in the System or what Al Broaddus likes to call our credibility, but I’m not sure that we’re wise to sit here and allow that view to persist if indeed that is the case.

As a consequence and in line with our discussions at this and previous meetings regarding the desirability of taking gradual steps, I think today is the day we should adjust our press statement and move to a reference to “patience.” I think the downside risks to that change are small. I do think the market will react “negatively” as we used to say, but I’m not sure such a reaction would have negative implications, quite frankly. If we were to retain the “considerable period” wording, I would hate to find us in the position of seeing Citicorp’s forecast of a 300,000 increase in January employment number actually materialize in next week’s announcement. We would be in a very uncomfortable position. If we go to “patience,” we will have full flexibility to sit for a year or to move in a couple of months. I don’t think we’re going to want to do the latter, but I’d certainly like to be in that position should a rate increase become necessary. That’s my view. Who’d like to comment? Governor Kohn.

Greenspan doesn’t think the economy is in a bubble.

Greenspan is not sounding the alarm.

Greenspan does not even want to raise the Fed Funds rate above 1%/year. Greenspan wants “patience”.

Greenspan is painting a picture of an extraordinary “degree of buoyancy…. Committee members have not reported on indications of a more unequivocally benign and positive economic outlook in a number of years…” The “back in the late 90s” is not Greenspan saying “this is another bubble”–Greenspan says, explicitly, that “bubble” is “not yet… the appropriate word”. It is, rather, an assessment that the economy is currently performing well. After giving that assessment, Greenspan then segues to considering tail risks: saying “the outlook seems extraordinarily benign, and I’ll get to the reasons why that bothers me shortly”. That’s where the “snap-back” phrase comes from.

So Mallaby’s basic thesis–that Greenspan believed in January 2004 that the economy was in a dangerous bubble and on the edge of catastrophe–is directly falsified by a five-minute look at the document from which Mallaby got the two phrases he quotes.

Mallaby continues:

Of course, this begs a question: If Mr. Greenspan understood the danger of bubbles, why did he nonetheless permit them–even rationalizing his policy with a public insistence that the best way to deal with bubbles was to clean up after they burst?…

Since Greenspan did not understand the dangers in the mid-2000s, Mallaby is asking a false question. He then gives an answer to his false question, and it is an answer that would be greatly to Greenspan’s discredit, were it to be true:

Most of the explanation lies in the political environment…. Greenspan was a hardened Washington veteran… calculated that acting forcefully against bubbles would lead only to frustration and hostile political scrutiny. And his caution was vindicated. When he did try to rein in risk-taking—calling, for example, for restraints on the government-sponsored housing lenders—he felt the heat. The housing-industrial complex denounced him for failing to understand mortgage finance and ran devastating TV ads to deter members of Congress from supporting Mr. Greenspan’s calls for regulatory intervention.

As Mallaby paints the picture, Greenspan didn’t do what he clearly knew to be his clear job. Why not? Because he “felt the heat”. Because he was “denounced for failing to understand mortgage finance”. Plus there were those “devastating TV ads”!

All this is to set up Mallaby’s conclusion as to who are the real culprits here:

It is too easy, and too comforting, to blame Alan Greenspan’s supposed intellectual errors for the 2008 crisis…. The origins of the crisis lay not in the maestro’s failure of understanding–which would be easy to correct. Rather, it lay in the failure of our politics. Who in this electoral season would bet that we are safer now?

But this is wrong: Alan Greenspan made a bad call in the mid-2000s. Alan Greenspan was never a coward.

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 Stakes of the Helicopter Money Debate: A Primer

Posted on September 26, 2016 by Brad DeLong

The swelling wave of argument and discussion around “helicopter money” has two origins:

First, as Harvard’s Robert Barro says: there has been no recovery since 2010.

The unemployment rate here in the U.S. has come down, yes. But the unemployment rate has come down primarily because people who were unemployed have given up and dropped out of the labor force. Shrinkage in the share of people unemployed has been a distinctly secondary factor. Moreover, the small increase in the share of people with jobs has been neutralized, as far as its effects on how prosperous we are, by much slower productivity growth since 2010 than America had previously seen, had good reason to anticipate, and deserves.

The only bright spot is a relative one: things in other rich countries are even worse.

The wave’s second origin comes in an institutional change that took place in rich countries around the year 1980, back in the era in which Paul Volcker took control of the Federal Reserve. Back then we changed our economic policy institutions. The stagflation of the 1970s convinced many that the political branches of government were incompetent at managing the business cycle. The business cycle disturbed inflation, unemployment, and short run growth. The political branches had tried to use the tools they controlled to manage the business cycle. The stagflation of the 1970s convinced many that they had failed and could not but fail. And the stagflation of the 1970s also convinced the political branches that they did not want responsibility for managing the business cycle—that to assume responsibility was to accept blame, because it would go badly.

Thus back in 1980 Paul Volcker grabbed for the Federal Reserve the power they released. Henceforth the Federal Reserve—and its kith and kin central banks elsewhere in the world—were to be “independent”: They were to be effectively freed from meddling by vote seeking politicians with or seeking soundbites. They were tasked be good technocrats finding a way for the economy between the Skylla of inflation and the Kharybdis of unemployment. And thus they were to manage the economy generate stable, satisfactory, and equitable growth.

But could the Federal Reserve and its kith and kin elsewhere do the job? Did they have the tools? Volcker’s view, and the consensus view of mainstream economists, was that they did have the tools: Milton Friedman had demonstrated, to the satisfaction of a rough consensus of mainstream economists, that central banks’ powers to create money with which to conduct financial open market operations and to both supervise and rescue the banking system were more than powerful enough to do the job.

Now note that back in 1936 [John Maynard Keynes had disagreed][]:

The State will have to exercise a guiding influence… partly by fixing the rate of interest, and partly, perhaps, in other ways…. It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself…. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative…

By the 1980s, however, for Keynes himself the long run had come, and he was dead. The Great Moderation of the business cycle from 1984-2007 was a rich enough pudding to be proof, for the rough consensus of mainstream economists at least, that Keynes had been wrong and Friedman had been right.

But in the aftermath of 2007 it became very clear that they—or, rather, we, for I am certainly one of the mainstream economists in the roughly consensus—were very, tragically, dismally and grossly wrong.

Now we face a choice:

Do we accept economic performance that all of our predecessors would have characterized as grossly subpar—having assigned the Federal Reserve and other independent central banks a mission and then kept from them the policy tools they need to successfully accomplish it?
Do we return the task of managing the business cycle to the political branches of government—so that they don’t just occasionally joggle the elbows of the technocratic professionals but actually take on a co-leading or a leading role?
Or do we extend the Federal Reserve’s toolkit in a structured way to give it the tools it needs?

Helicopter money is an attempt to choose door number (3). Our intellectual adversaries mostly seek to choose door number (1)—and then to tell us that the “cold douche”, as Schumpeter put it, of unemployment will in the long run turn out to be good medicine, for some reason or other. And our intellectual adversaries mostly seek to argue that in reality there is no door number (3)—that attempts to go through it will rob central banks of their independence and wind up with us going through door number (2), which we know ends badly…

[John Maynard Keynes had disagreed]: https://www.marxists.org/reference/subject/economics/keynes/general-theory/ch24.htm (John Maynard Keynes (1936): The General Theory of Employment, Interest and Money (London: Macmillan).

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:

Has Macro Policy Been Different since 2008?

Posted on August 31, 2016 by Brad DeLong

3 Month Treasury Bill Secondary Market Rate FRED St Louis Fed

Was macro policy different after 2008? I interpret that to be the question: “Did macro policy follow the same rule after 2008 that people had presumed before 2008 it would follow in a true tail event?” To answer that question requires determining just what policy rule people back before 2008 thought that the U.S. government was following. Let me propose four candidates for our (implicit) pre-2008 macroeconomic policy rule:

Limit fiscal policy to automatic stabilizers, and follow a Taylor rule with John Taylor’s coefficients (Taylor).
Follow Milton Friedman’s advice and target velocity-adjusted money: if nominal GDP is below trend, print more money and buy bonds; if that does not restore nominal GDP to either the trend level or the trend growth rate (depending on whether your favorite flavor has or does not have base-drift sprinkles), repeat (Friedman).
Use open market operations to manipulate the short-term safe nominal interest rate to stabilize inflation and unemployment as long as you are not at the zero lower bound. At the zero lower bound credibly promise to be irresponsible in the future in order to raise inflation expectations by enough to push the real interest rate down to its negative Wicksellian neutral rate value, and so restore real macroeconomic balance (Krugman).
Use open market operations to manipulate the short-term safe nominal interest rate to stabilize inflation and unemployment as long as you are not at the zero lower bound. At the zero lower bound resort to expansionary fiscal policy and do as much of it as needed, at least as long as interest rates on long-term government debt remain low (Blinder).

Were there any other live candidates for “the policy rule” back before 2008?

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