Tag: Martin Sandbu

Must-read: Dani Rodrik: “More on the Political Trilemma of the Global Economy”

Posted on by Brad DeLong

Must-Read: I find myself more on Martin Sandbu’s side than that of the very-sharp Dani Rodrik in this debate. This is largely, I think, because Dani remains at too abstract a level. The commitment of foreign trading partners to “openness”, whatever that turns out to mean in practice, enlarges domestic political and economic opportunities in some directions. But one’s own government’s reciprocal commitment to “openness”, whatever that turns out to mean in practice, restricts domestic political and economic opportunities in different directions. How much should a government and a people value the gains in the first set of directions? How much should a government and a people regret the loss in the second set?

These are questions that must be answered pragmatically. The devil is in the details. And ideologies–either Friedmanesque rants that globalization is always good or Trumpist rants that “we” are always outmaneuvred in trade deals by shifty foreigners–seem to me profoundly unhelpful here. And so the word “globalization” becomes an obstacle rather than an aid to thought…

Dani Rodrik: More on the Political Trilemma of the Global Economy: “Here are [Martin] Sandbu’s main points and my take on them…

…”if economic integration limits a national democracy’s room for manoeuvre, does it limit a national dictatorship’s opportunities any less?” I think Sandbu’s point is true for some dictatorships, but not all. Today the prevailing worry of progressives is that an oligarchy of financiers, investors, and skilled professionals has captured the polity and is using globalization as a way of imposing its policy priorities. What globalization does for these groups is actually to expand their political opportunities, rather than constrain them…. [In] a democracy… the electorate can decide on their own path… even when it may conflict what a narrowly based, internationally mobile elite want–and that is what hyper-globalization restricts….

“We should beware of conflating economic integration with technocracy.”… In practice, globalization is used to impose a particular technocratic set of rules serving the interests of particular groups. That it need not do so is a valid point for globalization in general, as long as don’t take it as far as hyper-globalization….

“Is [there] necessarily a loss of democracy when the rules are set internationally while most democratic institutions remain nationally rooted[?]… Negotiating rules together is an exercise of national self-determination, not its abrogation.”… As long as we are not trying to eliminate every transaction cost to international trade and investment, there are multiple models of globalization… leaving plenty of space for countries to devise their own social and economic arrangements….

The fact that an international rule is negotiated and accepted by a democratically elected government does not inherently make that rule democratically legitimate…. There are many ways in which globalization actually harms rather than enhances the quality of democratic deliberation. For example, preferential or multilateral trade agreements are often simply voted up or down in national parliaments with little discussion, simply because they are international agreements. Globalization-enhancing global rules and democracy-enhancing global rules may have some overlap; but they are not one and the same thing…. International commitments can be used to tie the hands of governments in both democratically legitimate and illegitimate ways…. The constraints really bind in the presence of a hyper-globalization/deep-integration model (a la Eurozone)…

Must-read: Martin Sandbu: “Manufacturing didn’t leave; it left workers behind”

Posted on by Brad DeLong

Must-Read: Martin Sandbu: Manufacturing didn’t leave; it left workers behind: “America’s blue-collar aristocracy fell on hard times long ago…

…but its ghost remains influential in politics. That much is clear from Hillary Clinton’s vow to ‘bring manufacturing back’ and Donald Trump’s railing against the ‘mortal threat to American manufacturing’ (presumably any number of foreign countries with which the US trades, but in this case the target was the Trans-Pacific Partnership trade agreement). One problem with this rhetoric, politically potent though it may be, is that manufacturing has never left the US. As the chart below shows, manufacturing output has grown at a steady pace for decades, only temporarily thrown off course by recessions before returning to its previous trend. American factories today produce as much as they ever have.

Of course the number of jobs in manufacturing has fallen deeply — US manufacturing employment peaked in the 1970s — with particularly steep slides in the recessions of the 2000s. And this is what drives the rhetoric, and makes the Trans-Pacific Partnership a particularly delicate issue, in the current US political campaign. Mark Muro and Siddharth Kulkarni are quite right to refer to the blue line above as a one-chart explanation of why voters are angry. That’s understandable even though, as Jeffrey Rothfeder points out, job numbers in US manufacturing have been on a steady increase since 2010. However, the fact that output has kept going up while employment has sunk like a stone means that the political narrative of manufacturing activity ‘stolen’, or whisked away to other countries, doesn’t quite add up. What the numbers show is, by definition, that manufacturing has become more productive as well as increasing in total output. In other words, what has been happening — since the 1970s — is a productivity-boosting restructuring, not a shrinkage…

Must-read: Martin Sandbu: “Four Takes on the Fed Fumble”

Posted on by Brad DeLong

Must-Read: That the Fed would be facing significant chances of recession and would be moving in the opposite policy direction than its peers over the winter was a serious risk of beginning a tightening cycle in December, and a risk that has now risen from a possibility to a probability.

What was the countervailing serious risk that starting the tightening cycle in December took off the table? I really do not see it…

Graph 5 Year 5 Year Forward Inflation Expectation Rate FRED St Louis Fed

Martin Sandbu: Four Takes on the Fed Fumble: “Remember September? Markets seemingly couldn’t wait for the Federal Reserve to raise interest rates…

…Now, however, markets seemingly can’t wait for the Fed to definitively snip the fledgling tightening cycle in the bud. And a growing chatter wonders whether the Fed made a mistake…. Market pricing now implies nearly a two-thirds probability that Fed policymakers will get past next September without a single further rate rise. The change in market sentiment is easy enough to understand… financial turmoil in China… slide in global stock markets… sharp US growth slowdown…. There are (at least) four different ways one may assess the Fed’s actions. First, the plain ‘the Fed goofed up’ view… Paul Krugman, Brad DeLong and Larry Summers. Free Lunch readers will know that this column shares their view on this issue… Jed Graham….

A second, perhaps more interesting, take is that in hindsight the Fed shouldn’t have raised rates, but that it couldn’t have known this at the time…. A third take… the mistake was to create expectations that caused financial conditions to tighten long before December…. A fourth view… the Fed was right to hike but wrong in thinking it would then proceed to lift rates through this year…. But… the arguments for a rise were… for the beginning of a sustained if gradual process. If that is now derailed, it removes much of the rationale for the first increase.

It also leaves open the question of what to do next…. Should the Fed reverse course? That is the view of Narayana Kocherlakota…

Must-read: Martin Sandbu: “Ask the big question on central banking”

Posted on by Brad DeLong

Must-Read: Martin Sandbu: Ask the big question on central banking: “Mervyn King and Goodfriend… the controversial decision by the Riksbank to raise interest rates…

…We will not adjudicate whether the decision was ‘not unreasonable’, as King and Goodfriend claim, beyond noting that every rich-country central bank that raised rates early in the recovery (that includes not just Sweden, but Israel, Norway, Denmark, and the eurozone) had to lower it significantly later. For more on this point, read Andrew Haldane’s speech from last year on the challenges of being stuck at low interest rates…

Must-reads: January 5, 2016

Posted on by Brad DeLong

Must-read: Martin Sandbu: “Free Lunch: On Models and Making Policy”

Posted on by Brad DeLong

Must-Read: Superb from the extremely sharp Martin Sandbu! Only three quibbles:

  1. There are indeed “three great economists” in the mix here, but their names are Summers, Krugman, and Blanchard…
  2. This isn’t really a conversation that would have taken place even in an academic setting. If I have ever been in the same room at the same time with Larry, Paul, and Olivier–let alone all of Olivier’s coauthors, Michael Woodford, Danny Vinit, and Lukasz Rachel and Thomas Smith–I cannot remember it. And discussions and exchanges in scholarly journal articles are formal and rigid in an unhelpful way.
  3. Do note that Keynes was on Summers’s side with respect to the importance of maintaining business confidence: cf.: General Theory, ch. 12, “The State of Long-Term Expectation”

Martin Sandbu: Free Lunch: On Models and Making Policy: “The internet has… open[ed] up to the public…

…discussions… that previously took place mostly in face-to-face gatherings or scholarly journal articles. Neither medium was particularly accessible….

Summers posted a characteristically succinct statement on why he disagreed with the Federal Reserve’s decision to begin tightening… His analysis is well worth reading in full, but the trigger of the ensuing debate was his explanation for why the Fed thinks differently: ‘I suspect it is because of an excessive commitment to existing models and modes of thought. Usually it takes disaster to shatter orthodoxy.’… DeLong expressed doubts that the Fed’s analysis was indeed compatible with existing models; Krugman asserted that conventional models straightforwardly showed the Fed to be in the wrong, and that… policy was driven… by… ‘a conviction that you and your colleagues know more than is in the textbooks’….

Summers then responded… showed a fascinating divergence…. DeLong and Krugman think the Fed erred by ignoring… models…. Summers thinks the Fed erred by ignoring things that such models do not capture…. Summers is also much more comfortable with the notion that policymakers should aim to underpin market confidence. That notion has often been derided by Krugman…. Two quotes rather nicely capture the methodological disagreement here. Summers writes: ‘I think maintaining confidence is an important part of the art of policy…. Paul is certainly correct in his model but I doubt that he is in fact.’ DeLong responds: ‘Larry, however, says: We know things that are not in the model. Those things make Paul’s claim wrong. My problem with Larry is that I am not sure what those things are.’…

What is a policymaker to do if she thinks this is the case in reality, even if no extant model captures it? Surely not wait for 30 years in the hope that new mathematical techniques enable economists to model that reality. In his willingness to listen to those who may have an untheoretical ‘feel’ for the market, and in his intellectual respect for the limits of his own knowledge, Summers comes across as the most Keynesian of these three…