An experimental bond-trading program being run at the Federal Reserve Bank of New York could fundamentally change the way the central bank sets interest rates.
Fed officials see the program, known as a "reverse repo" facility, as a potentially critical tool when they want to raise short-term rates in the future to fend off broader threats to the economy. Of particular concern for the Fed is finding a way to contain inflation once the trillions of dollars it has sent into the financial system get put to use as loans.
Like the plumbing beneath the floorboards in a home, this program is unseen by most investors and it isn't part of the Fed's current efforts to spur growth. Launched this year, it is still in a testing stage and isn't expected to be fully implemented for years.
Under this system, the Fed would raise short-term interest rates by borrowing in the future against its large and growing securities portfolio.
The Fed traditionally has managed short-term interest rates by shifting its benchmark federal-funds rate, an overnight intrabank rate. It did this by controlling how much money flowed into and out of the banking system on a daily basis. Small adjustments could significantly impact short-term rates. Since the Fed has pumped $2.5 trillion into the economy by purchasing bonds, the old system won't work unless the central bank pulls much of this money out. Instead, what Fed officials increasingly envision is a system in which it would tie up this money as needed by offering investors and banks interest on their funds.
The stakes are enormous. Right now banks aren't lending this money aggressively. But as the economy expands and lending picks up, the Fed will need to tie up the money to ensure it doesn't cause the economy or financial markets to overheat.
"The Federal Reserve has never tightened monetary policy, or even tried to maintain short-term interest rates significantly above zero, with such abundant amounts of liquidity in the financial system," according to a draft of a new research paper by Brian Sack, the former head of the New York Fed's markets group, and Joseph Gagnon, an economist at the Peterson Institute for International Economics and a former Fed economist.
Short-term rates—which serve as a benchmark for long-term rates for mortgages, car loans and other borrowing—are now near zero and the Fed doesn't plan to raise them for a couple of years. In normal times, the Fed cuts short-term rates to spur growth and raises them when it wants to slow growth.
When it does want to raise rates, the Fed under the repo program would use securities it accumulated through its bond-buying programs as collateral for loans from money-market mutual funds, banks, securities dealers, government-sponsored enterprises and others.
The rates it sets on these loans, in theory, could become a new benchmark for global credit markets.
The head of the New York Fed's markets group, Simon Potter, in a speech at New York University this month, described the new program as "a promising new technical advance."
Some market observers are going a step further and arguing that the Fed should abandon the fed-funds rate as its main lever for managing a broad spectrum of rates in the financial system.
Mr. Sack is among them. In his draft paper with Mr. Gagnon, they say the reverse-repo program should become a linchpin for the way the Fed manages interest rates in the future.
Mr. Sack, who is now co-director of global economics at the hedge fund D.E. Shaw, and Mr. Gagnon argue the Fed should discard its effort to target the fed-funds rate and instead use these repo trades as a primary way of guiding the borrowing rates that ripple through the economy.
The paper is notable because Mr. Sack, during his tenure at the New York Fed from 2009 to 2012, led the central bank's effort to find new ways to manage short-term interest rates.
Barclays analyst Joseph Abate said the repo program appears to have set a floor under short-term lending rates even during the small-scale tests. The general-collateral rate—the borrowing rate for the most common type of repo—has recently settled at about 0.10%, about 0.05% above the fixed rate the Fed has set for the repo facility and about 0.05% higher than it was earlier in the fall before the tests were launched.
Mr. Abate also said the Fed should abandon its fed funds target and stick with this program.
"The Fed has a very powerful tool on its hands," he said.
Without new tools like the repo facility, the Fed might not be able to control interest rates or it might be forced to take financially destabilizing steps such as selling the securities in its portfolio in a hurry.
The idea for the repo program bubbled up from the New York Fed's market group in part because another tool wasn't working well. Officials had seen a program known inside the Fed as IOER, for "interest on excess reserves," as the main avenue for managing short-term rates amid the flood of money in the system. Under this program, the Fed pays banks 0.25% for cash they keep at the central bank. In theory, when the Fed wants to raise short-term rates, it would raise this interest rate. Rather than lend out money, banks should want to keep it with the Fed.
In reality, the IOER program hasn't worked well, in part because some big market players including Fannie Mae and Freddie Mac can't participate. The fed funds rate has hovered well below the Fed's 0.25% floor for years. That isn't a problem now because the Fed wants to hold rates very low, but it raises concerns that the central bank won't have tight control of rates when the time comes to raise them.
The reverse-repo program extends the Fed's reach beyond traditional banks to Fannie, Freddie and others, and in theory should give the central bank more control over interest rates. Mr. Sack and Mr. Gagnon say the Fed should use the IOER program in conjunction with the reverse-repo program to set rates.
The Fed has been testing the repo program with 139 different counterparties in the past few months, including 94 money-market funds, and setting an interest rate of 0.05%.
"By reaching financial institutions that are ineligible to earn [interest on excess reserves]…the facility widens the universe of counterparties that should generally be unwilling to lend at rates below those rates available through the central bank," Mr. Potter said in his speech.
"The Lord of Light wants his enemies burned. The Drowned God wants them drowned. Why are all the gods such vicious cunts? Where's the God of Tits and Wine?"
- Tyrion Lannister
"The common people pray for rain, healthy children, and a summer that never ends. It is no matter to them if the high lords play their game of thrones, so long as they are left in peace. They never are."
- Jorah Mormont
"These bad people are what I'm good at. Out talking them. Out thinking them."
- Tyrion Lannister
"What happened? I think fundamentals were trumped by mechanics and, to a lesser extent, by demographics."
- Michael Barone
Thursday, December 12, 2013
Fed Moves Toward New Tool for Setting Rates: 'Reverse Repo' Program Could Be Critical to Fending Off Inflation
So, for the most part, something White House aides hastily drew up in the summer of 2011 as a trigger has become, for the most part, settled policy. How did a result the administration would have dismissed as a worse-case scenario come to pass? The first reason is that the White House mistakenly took Republican denunciations of the long-term debt at face value. Since Republicans appeared desperate to cut retirement programs, Obama assumed they would trade some form of higher tax revenue to get it. But the GOP’s opposition to higher taxes in any form, even closing loopholes, has trumped its commitment to lower spending for more than three decades.
Second, the administration failed to grasp that, alongside their aversion to higher taxes, conservatives had turned against policy-making itself. This is a transformation I failed to notice as well when I assumed in 2011 that the parties would find a way to muddle through and avoid the pain. The 2011 debt-ceiling agreement rested on the premise that, if the default was budget cuts deliberately designed to make both parties unhappy, both parties would cut some kind of deal.
But the conservative movement opposes not just the substance of compromise but the process itself....
It is true that this deal, by itself, never balances the budget. But even if that’s your goal, why should that prevent you from supporting something? The normal standards of evaluating legislation – does this improve things relative to the status quo – have become completely alien on the right. Look at the way Barbara Mikulski, one of the most liberal senators, frames the deal: “I will have to take a $45 billion downgrade from the Senate number, but the House is coming up $45 billion, so I think that’s a rational compromise.”
Halfway between what one party wants and what the other party wants is her definition of a fair bargain. Now look at how conservatives frame the same thing. Here’s a Heritage Foundation op-ed:
Under the deal, discretionary spending would rise to $1.012 trillion in 2014 and $1.014 trillion in 2015, a $63 billion total increase (though it does little to provide a real and sustained fix for President Obama's mismanagement of defense). This is a significant achievement for the president, who believes that government spending is a panacea to America's economic woes.There’s no sense whatsoever that the other party, which controls one chamber of Congress and the White House, ought to have any say at all. “My party should get everything” is the presumed starting and ending point.
...And here are some positives:Fischer, who holds both U.S. and Israeli citizenship and lives in New York, stepped down as governor of the Bank ofIsrael on June 30, midway through his second five-year term. He was credited with helping his nation weather the global economic crisis better than most developed countries.
. . .I don’t quite understand that last comment, as the Fed was already cutting rates in 2007. Does anyone know what they mean? In any case, Israel came closer to NGDP level targeting that anyone else that I am aware of, with the possible exception of Australia. So if Fischer is a discretionary policymaker, at least he’s a talented discretionary policymaker.
Fischer earned a reputation as a trailblazer as the first central banker to cut interest rates in 2008 at the start of the global crisis and the first to raise them the following year in response to signs of a financial recovery.
I wish Obama had picked Christy Romer, but I certainly support Fischer. He’s highly talented and a mainstream monetary economist. Bernanke and Draghi (and many other famous economists) were his students.
Unprecedented Austerity by Krugman
"You can see that there was a brief, modest spurt in spending associated with the Obama stimulus — but it has long since been outweighed and swamped by a collapse in spending without precedent in the past half century. Taking it further back is tricky given data non-comparability, but as far as I can tell the recent austerity binge was bigger than the demobilization after the Korean War; you really have to go back to post-World-War-II demobilization to get anything similar.
And to do this when the private sector is still deleveraging and interest rates are at the zero lower bound is just awesomely destructive."
Wednesday, December 11, 2013
Alan Blinder: The Fed Plan to Revive High-Powered Money: "Don't only drop the interest paid rate paid on banks' excess reserves, charge them:** Unless you are part of the tiny portion of humanity that dotes on every utterance of the Federal Open Market Committee, you probably missed an important statement regarding the arcane world of 'excess reserves' buried deep in the minutes of its Oct. 29-30 policy meeting. It reads: '[M]ost participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage.' As perhaps the longest-running promoter of reducing the interest paid on excess reserves, even turning the rate negative, I can assure you that those buried words were momentous. The Fed is famously given to understatement. So when it says that "most" members of its policy committee think a change 'could be worth considering', that's almost like saying they love the idea. That's news because they haven't loved it before..."(via DeLong)
Tuesday, December 10, 2013
Monday, December 09, 2013
Sunday, December 08, 2013
Still playing around with the question of secular stagnation. Based on some recent conversations, it seems to me that it’s useful to put some numbers to the issue – to quantify, at least roughly, the hole that seems to have developed in sustainable demand.
In doing all this, the key point is NOT to focus on events since crisis struck; this is not a case of taking a business-cycle slump and imagining that it will last forever. Instead, the argument is that the sources of demand during the good years – the Great Moderation from 1985-2007 – are not going to be available even when the aftereffects of crisis have faded away.
CBO thinks that we’re looking at potential growth around 1 percentage point slower than it was during the Great Moderation. To think about how this affects demand, consider the simple “accelerator”, in which producers, other things equal, invest enough to keep the ratio of capital to output constant as the economy grows. Here’s the ratio of fixed assets to GDP:
It’s somewhat above 2. This says that other things equal, a 1 percentage point drop in potential growth would reduce investment spending by 2 percent of GDP.
So between the end of rising leverage and slowing potential growth, we seem to be depressing aggregate demand by 4 percentage points. That’s a lot!
The average real rate during the GM years was 1.9 percent. Given the factors I’ve described, it seems hard to avoid the conclusion that the average real rate looking forward will have to be negative. If inflation stays relatively low, e.g. 2 percent, this would mean an economy that often, perhaps usually, finds itself in a liquidity trap.
What might change this scenario? One key point could be trade. Before the 1980s, the US had more or less balanced trade. During the Great Moderation era, it ran an average current account deficit of 3 percent of GDP. Eliminating that deficit somehow would reverse most of my shortfalls. I would say, however, that the most likely way to reduce the deficit would be via a weaker dollar, achieved through low real interest rates, achieved in turn with a higher inflation target.
In general, I do think the secular stagnation conversation is a real step forward. So it's a bit frustrating, in this context, to see Krugman speculating about the "natural rate" in terms of a Samuelson-consumption loan model, without realizing that the "interest rate" in that model is the intertemporal substitution rate, and has nothing to do with the Wicksellian natural rate. This was the exact confusion introduced by Hayek, which Sraffa tore to pieces in his review, and which Keynes went to great efforts to avoid in General Theory. It would be one thing if Krugman said, "OK, in this case Hayek was right and Keynes was wrong." But in fact, I am sure, he has no idea that he is just reinventing the anti-Keynesian position in the debates of 75 years ago.
The Wicksellian natural rate is the credit-market rate that, in current conditions, would bring aggregate expenditure to the level desired by whoever is setting monetary policy. Whether or not there is a level of expenditure that we can reliably associate with "full employment" or "potential output" is a question for another day. The important point for now is "in current conditions." The level of interest-sensitive expenditure that will bring GDP to the level desired by policymakers depends on everything else that affects desired expenditure -- the government fiscal position, the distribution of income, trade propensities -- and, importantly, the current level of income itself. Once the positive feedback between income and expenditure has been allowed to take hold, it will take a larger change in the interest rate to return the economy to its former position than it would have taken to keep it there in the first place.
There's no harm in the term "natural rate of interest" if you understand it to mean "the credit market interest rate that policymakers should target to get the economy to the state they think it should be in, from the state it in now."And in fact, that is how working central bankers do understand it. But if you understand "natural rate" to refer to some fundamental parameter of the economy, you will end up hopelessly confused. It is nonsense to say that "We need more government spending because the natural rate is low," or "we have high unemployment because the natural rate is low." If G were bigger, or if unemployment weren't high, there would be a different natural rate. But when you don't distinguish between the credit-market rate and time-substitution rate, this confusion is unavoidable.DeLong and Mason tweet on subject
Saturday, December 07, 2013
If you go to the Third Way link he provides, a number of the top officers and trustees come from Warburg Pincus, where Geithner ended up.
Harless is in comment section making same points below:
Andy Harless tweets on Stephen Williamson (last tweet below is most recent):
"Increasingly I think the key to Williamson's QE->deflation result is neither AS nor abuse of RatEx but a heroic fiscal policy assumption...."
Williamson's heroic fiscal policy assumption results from the fact that he is trying to model a sticky price world w a flexible price model
I call the QE->deflation controversy a draw. Krugman, Rowe,
DeLong responds to above with ".
Harless: If you think fiscal policy determines the price level, it's reasonable to expect *eventual* deflation in response to a ZLB monetary stimulus
Realistically, though, if QE causes deflation, it does so by causing today's prices to rise ("inflation") relative to future prices.
Now that (I think) I understand what's going on, I no longer find Williamson's result counterintuitive, just his assumptions too unrealistic
If the world really worked according to Williamson's assumptions, then deflation is exactly what I'd expect from QE."
Stephen Williamson's blog
Noah Smith's summary of bloggers
David Glasner's take
Friday, December 06, 2013
Mandela, My Countryman by Nadine Gordimer
interview with Neville Alexander
The day following his release, when Mr. Mandela met hundreds of reporters for his first news conference in nearly 30 years in the terraced garden of Archbishop Desmond Tutu’s residence in Bishopscourt, in the lee of Table Mountain, his message of reconciliation found its most powerful expression...
But it was an act of particular kindness that remains lodged most powerfully in the memory. As the news conference unfolded, a white reporter stepped forward and identified himself as Clarence Keyter, the chief political correspondent of the Afrikaans-language service of the state-run broadcasting monopoly, SABC. As he asked his question, Mr. Keyter seemed deeply apprehensive — perhaps not surprising, considering that the SABC had served unswervingly, for decades, as the legitimizing voice of apartheid.
Sensing Mr. Keyter’s unease, Mr. Mandela rose from his seat, walked forward a dozen paces, shook the reporter’s hand and thanked him, saying that in his last years in prison, when he had been given a radio, he had relied on Mr. Keyter’s reports to learn “what was going on in my country.” Mr. Keyter, stunned, had tears welling in his eyes. The rest of us knew then, if we didn’t before, that in Mr. Mandela, the country had a man who was capable — if anybody was — of healing the historical wounds that had made South Africa so tragic for so long.
Thursday, December 05, 2013
Bernanke's June taper-talk caused interest rates to rise.
Another trolly post by Smith:
When teaching econ, start with the parts that work
How should we empirically verify whether QE increased or decreased inflation? by Tony Yates
U.S. Growth Faster Than Estimated as Businesses Stock Up
The economy expanded much faster than first thought in the third quarter, as the government on Thursday revised its estimate of growth in the period to a 3.6 percent annual rate from 2.8 percent.
That was significantly better than the 3.1 percent pace economists had been expecting, and it marked the best quarter for growth since the first quarter of 2012, when output jumped by 3.7 percent. It also marked the first time since then that growth had exceeded 3 percent.
Much of the improvement came from additional stocking up on inventory by businesses as well as a slightly improved trade picture.
Inventory changes are notoriously volatile, so while the healthier signals would be welcomed by economists, inventory gains can essentially pull growth forward into the third quarter, causing fourth-quarter gains to slacken.
Indeed, Wall Street was already estimating that the fourth quarter of 2013 would be much weaker than the third quarter, with growth estimated to run at just below 2 percent, according to Bloomberg News.
The anemic pace of fourth-quarter growth also stems from the fallout of the government shutdown in October, as well as the continuing fiscal drag from spending cuts and tax hikes imposed by Congress earlier in 2013.
Still, if the better data on growth from the Commerce Department on Thursday is followed by more robust numbers Friday for the nation’s November job creation and unemployment, it increases the odds the Federal Reserve will soon ease back on stimulus efforts. The jobs data is scheduled to be released by the Labor Department at 8:30 a.m. Friday.
The labor market data for October was significantly better than expected, despite the government shutdown, and the consensus among economists polled by Bloomberg News is that the economy may have created about 180,000 new jobs in November, while the unemployment rate may have fallen to 7.1 percent from 7.3 percent in October.
Federal Reserve policy makers next meet on Dec. 17 and 18, with an announcement and news conference with the Fed’s chairman, Ben S. Bernanke, scheduled for the afternoon of Dec. 18.
Investors are eager for signs of stronger economic growth after years of only tepid gains, but they are also nervous about how quickly the Fed will step back from its aggressive stimulus efforts and let long-term interest rates begin to inch back up.
“You can never be unhappy with a 3.6 percent number for gross domestic product,” said Ian Shepherdson, chief economist at Pantheon Macreconomics. “But the details are more sobering than the headlines. Apart from the inventory numbers, the revisions are pretty trivial.”
For instance, he said, “Final sales, meaning the demand for goods and services excluding inventories, actually slowed. Either companies thought demand would accelerate and built inventories in anticipation of sales that didn’t happen, or they’re building anticipation of stronger demand in the fourth quarter.”
Mr. Shepherdson added: “It’s very likely we’ll see much slower inventory gains in the fourth quarter.” As a result, if demand doesn’t pick up in the final three months of the year, he explained, growth in the fourth quarter will likely be in the range of 1 percent to 2 percent, he Shepherdson estimated.
Today's Good GDP News Is Actually Bad News by Yglesias
I saw a lot of celebratory tweets just now when the Bureau of Economic Analysis revised its estimate of third quarter GDP upwards to 3.6 percent growth. And, indeed, that's a good number and an upside surprise. But the details are actually quite bad:
The acceleration in real GDP growth in the third quarter primarily reflected an acceleration in private inventory investment, a deceleration in imports, and an acceleration in state and local government spending that were partly offset by decelerations in exports, in PCE, and in nonresidential fixed investment.
Wednesday, December 04, 2013
Binyamin Appelbaum had an interesting post about how many economists would like to see a higher rate of inflation to help recover from the downturn. The piece emphasizes the role of inflation in lowering real wages, with the argument that lower real wages are necessary to increase employment.
While there may be some truth to this point, it is worth fleshing out the argument more fully. At any point in time, there are sectors in which demand is increasing and we would expect to see rising real wages and also sectors where demand is falling and we would expect to see real wages do the same (e.g. Wall Street traders -- okay, that was a dream).
Anyhow, when inflation is very low, the only way to bring about declines in real wages in these sectors is by having lower nominal wages. Since workers resist nominal pay cuts, we end up not having this adjustment and therefore we end up with fewer jobs than would otherwise be the case. However it is an important qualification in this story that it is not about reducing real wages for all workers, only for some subset.
The other important point is that higher inflation promotes growth in other ways. First and foremost it makes investment more profitable by reducing real interest rates. Firms are considering spending money today to sell more output (e.g. software, computers, Twitter derivatives etc.) in the future. If they expect to sell this output for higher prices because of inflation, then they will find it more profitable to invest today. If we can keep interest rates more or less constant and raise the expected rate of inflation, then firms will have much more incentive to invest. This process seems to be working successfully in Japan at the moment.
Finally, inflation reduces debt burdens. Everyone who has debt in nominal dollars, such as homeowners, students, state and local governments, and the national government, will see the real value of its debt fall in response to inflation. This reduces their debt burden and makes it easier to spend. This would likely also be an important source of demand growth from higher inflation.
While many economists do emphasize the wage story, to my mind the other parts are likely more important. And, if higher inflation leads to more employment, this will increase workers' bargaining power and allow them to acheive wage gains that are likely to quickly offset any losses due to inflation -- although the Wall Street traders may not make up the lost ground.
Tuesday, December 03, 2013
Let me get this straight:Three things we learned from today’s Obamacare update by Sarah Kliff
–Sen. Murray and Rep. Ryan may actually agree on a budget, i.e., top line discretionary spending numbers, that shaves a bit off of the mindless 2014/15 sequester cuts?
–The healthcare.gov website is on the mend—not perfect, but much better.
–Speaker Boehner, as per the link above, is solidly on record against another shutdown; Sen. Cruz is nowhere in sight.
Must one pinch oneself? Is Dysfunction Junction applying for a name change? Is this the beginning of some sort of turnabout?
Surely not, but instead of the usual “everything’s as bad as ever, don’t be fooled!” let’s contemplate one aspect of this (briefly, as I’m on the road, scrunched in an airplane seat that would be a tight fit for a four-year old; btw, here’s a thought: you can’t lean your seat back in coach! Sorry, but unless I’m your dentist, it just doesn’t work).
That aspect is not pretty, I grant you, but it is: disgust. Polls quite clearly reveal that most people, even if they’re not paying that much attention, have pretty much come to loathe the DC dysfunction act.
There were 1 million visitors to HealthCare.gov Monday. And there have been 380,000 visitors to HealthCare.gov as of noon today. This is slightly higher traffic than Monday, when 375,000 visitors came to the Web site by noon.According to Massachusetts, all of the healthy people will sign up last minute in March.
"We know that consumers are actively shopping and enrolling in coverage every day," Medicare spokeswoman Julie Bataille said. "We believe there's an indication that these will grow over time."
(via David Warsh)
Mark A. Sadowski on Bernanke and Fed policy from 2006 - 2008:
Sunday, December 01, 2013
The White House says it met its Obamacare goal. There’s still more work ahead. by Sarah Kliff
Inflationistas at Bayes by Krugman
Minimum Wages, Bargaining Power, Poverty, and Work by Jared Bernstein
Saturday, November 30, 2013
New Thinking and Old Books Revisited by Krugman
I learn from Francesco Saraceno that some people are attacking me for, as they see it, defending an economic orthodoxy that has failed. It’s kind of an odd place to find myself, given how critical I’ve been of the way the economics profession has dealt with the crisis. But it’s not entirely unfair: I am quite skeptical of people whose response to the sorry state of affairs is to declare that what we need is a whole new field.
Why my skepticism? I’m all for new ideas that add to our understanding. But ideas like that aren’t easy to come by! Mark Thoma’s classic crack — “I’ve learned that new economic thinking means reading old books” — has a serious point to it. We’ve had a couple of centuries of economic thought at this point, and quite a few smart people doing the thinking. It’s possible to come up with truly new concepts and approaches, but it takes a lot more than good intentions and casual observation to get there.
So, for example, what do I say when I read something like this from someone who apparently considers himself a bold rebel against orthodoxy?
“Rational thinking is an important aspect of human nature, but we have imagination, we have ambition, we have irrational fear, we are swayed by other people, we get indoctrinated and we get influenced by advertising,” he says. “Even if we are actually rational, leaving it to the market may produce collectively irrational outcomes. So when a bubble develops it is rational for individuals to keep inflating the bubble, thinking that they can pull out at the last minute and make a lot of money. But collectively speaking . . . ”
My answer, to put it in technical terms, is “Well, duh.” Maybe grad students at some departments, who are several generations into the law of diminishing disciples, really don’t know that rational behavior is at best a useful fiction, that markets aren’t perfect, etc, etc. But does this come as news to Robert Shiller? To Ben Bernanke? To Janet Yellen? To Larry Summers? Would it have come as news to Irving Fisher or Walter Bagehot?
The question is what you do with this insight.
There is definitely a faction within economics that considers it taboo to introduce anything into its analysis that isn’t grounded in rational behavior and market equilibrium. But what I do, and what everyone I’ve just named plus many others does, is a more modest, more eclectic form of analysis. You use maximization and equilibrium where it seems reasonably consistent with reality, because of its clarifying power, but you introduce ad hoc deviations where experience seems to demand them — downward rigidity of wages, balance-sheet constraints, bubbles (which are hard to predict, but you can say a lot about their consequences).
You may say that what we need is reconstruction from the ground up — an economics with no vestige of equilibrium analysis. Well, show me some results. As it happens, the hybrid, eclectic approach I’ve just described has done pretty well in this crisis, so you had better show me some really superior results before it gets thrown out the window.
Oh, and if you think you’ve found a fundamental logical flaw in one of our workhorse economic models, the odds are very strong that you’ve just made a mistake.
Does this mean that nothing should change in the way we teach economics? By no means — it’s quite clear that the teaching of macroeconomics has gone seriously astray. As Saraceno says, the simple models that have proved so useful since 2008 are by and large taught only at the undergrad level — they’re treated as too simple, too ad hoc, whatever, to make it into the grad courses even at places that aren’t very ideological.
Furthermore, to temper your modeling with a sense of realism you need to know something about reality — and not just the statistical properties of U.S. time series since 1947. Economic history — global economic history — should be a core part of the curriculum. Nobody should be making pronouncements on macro without knowing a fair bit about the collapse of the gold standard in the 1930s, what actually happened in the stagflation of the 1970s, the Asian financial crisis of the 90s, and, looking forward, the euro crisis.
I’d put my oar in for history of thought, too. Watching highly trained economists reinvent old economic fallacies suggests to me that there would be real payoff to requiring that students have some idea how the current leading doctrines got to where they are.
But must we reconstruct all of economics? No. Most of what we need, at least for now, is in those old books.
It used to be different. The preeminent economist Robert Samuelson once said "I don't care who writes a nation's laws, or crafts its treatises, if I can write its economics textbooks." And he was the one writing its textbooks for a long while. In the first version of his blockbuster textbook Economics (1948), the study of macroeconomics came first. And institutions were emphasized before the more abstract microeconomics that start off the education now. One of the central ideas was the “fallacy of composition,” or how things true of individual people or markets were not true of the aggregate behavior of the economic system.
That should be Paul not Robert, as a commenter notes.
Friday, November 29, 2013
...Even using the inflation measure favored by the Bank of Japan, which includes energy but excludes fresh foods, Japanese prices rose 0.9 percent over the last year, which is still far below the 2 percent that the bank is aiming for.
Just as currency markets priced in higher inflation last winter and spring, inflation that is just now starting to materialize, if markets perceive that the government is taking the uptick in prices as victory, things could swing the other way just as quickly.
In other words, the record on Abenomics is so-far, so-good. There is a lot more reason for optimism that the world's third-largest economy has a true recovery underway than there was a year ago, and the most recent inflation data is an important part of that story. But nobody in Japan should be partying like it's 1989.
Jennifer Thompson and Ben McLannahan: Japan inflation data offer fillip to Shinzo Abe: "Japan is on track to win its war on deflation with the latest consumer price inflation figures showing the highest reading since the country slipped into deflation 15 years ago. Core consumer price index inflation, which excludes fresh food but includes energy, hit 0.9 per cent in October, up from 0.7 per cent the previous month and in line with economists’ expectations. Excluding both fresh food and energy, it reached 0.3 per cent, the highest reading since 1998, indicating that rising energy costs alone were not the sole factor in inflationary pressure..."
Williamson has a lot of equations running around — fearful plumbing, as Rudi Dornbusch would have put it — but the essence of this story, whether he realizes it or not, involves movements in the Wicksellian natural rate of interest — the real interest rate that would match savings and investment at full employment.
Thursday, November 28, 2013
Liberalism Will Survive Obamacare by John Cassidy
On one level, the “bed-wetters”—according to Franklin Foer, the editor of the revitalized New Republic, this is the term that White House officials reserve for the Administration’s worrywart supporters—are obviously right. The launch of healthcare.gov has been horrendously botched, and Obama’s misleading statements about what would happen to Americans who wanted to keep their individual policies have come back to bedevil him. In Foer’s words, the Administration “has stifled bad news and fudged promises; it has failed to translate complex mechanisms of policy into plain English; it can’t even launch a damn website. What’s more, nobody responsible for the debacle has lost a job or suffered a demotion.”
Actually, that isn’t quite accurate...On one hand it's obviously bad that White House officials didn't nail healthcare.gov's launch. But it's heartening that they aren't panicking over the media feeding frenzy. They seem to be making progress. One possible explanation is they got more confidence after winning the government shutdown and being proven right.
BERLIN — After five weeks of negotiations, Chancellor Angela Merkel’s conservatives reached an agreement on Wednesday with their Social Democratic rivals on a program for a new coalition government, with concessions to the left that pleased labor leaders and almost immediately drew criticism from business interests.
The 185-page document calls for establishing a national minimum wage — a first for the country — as well as increased pensions for some recipients and early retirement eligibility for others. It would offer dual citizenship to Turks and other foreigners who are born and raised in Germany, and it promises a new law by next summer to revitalize plans for renewable energy.
More broadly, though, it reaffirms Germany’s current course in Europe, much criticized by southern Europeans as burdening them with austerity. And the plans for improving Germany’s ailing infrastructure seemed likely to fall far short of the extra 7 billion euros, or $9.5 billion, a year in spending that a commission of government experts said was needed.
Germany’s important business lobby echoed fears expressed by the government’s Council of Economic Advisers this month that Ms. Merkel and her partners were moving away from the labor and welfare overhaul policies of the last Social Democratic chancellor, Gerhard Schröder. Those policies [sic] are widely seen as a foundation for the country’s success in overcoming the 2008 financial crisis and weathering the euro zone’s troubles since.
Dead Filipinos and Housing Bubbles Are Not Good News by Dean Baker
Neil Irwin gave us a list of five economic trends to be thankful for this Thanksgiving. Two of the items do not belong there, or at least not without serious qualification.Three good items from Irwin:
2) Fewer layoffs.
4) More job openings.
5) Debt burdens keep on falling. The ratio of Americans' income going to meet debt obligations has plummeted in recent years, as consumers have both reduced debt burdens (by paying them down and in some cases defaulting) and benefited from lower interest rates. The debt service ratio was only 9.89 percent in the second quarter, hovering near an all-time low of 9.84 percent from late 2012 (the data go back to 1980). That ratio was 13.5 percent in the third quarter of 2007, before the crisis. Congratulations, America! You're making progress in getting your household debts to a more manageable level.
And all five trends are a reminder that, even, as dark as the economy has looked in recent years, there are still some happier things going on that are worth toasting.
John Cassidy Explains That Those Parts of ObamaCare That Are “Liberal” Are Working Very Well by DeLong
And what about the liberals—the ones who pushed the White House to pursue something more radical than a souped-up version of Romneycare? Even if the A.C.A. were to collapse before it got going—and as I’ve said several times, I don’t expect this will happen—they wouldn’t be routed; they would be vindicated. Far from slinking away and conceding that their grand plans had failed, they would once again take up the campaign, which has been active in various forms since the nineteen-sixties, for the public option, and perhaps even a single-payer system…
Wednesday, November 27, 2013
From Torsten Slok at Deutsche Bank:
[F]iscal drag in 2013 is 2.4%, ie if GDP growth in 2013 ends up being 1.7% then if we had not had the fiscal drag then GDP growth would instead have been 4.1% (=1.7% + 2.4%). ..
...Translated into nonfarm payrolls this means that instead of having nonfarm payrolls at 186k - the average monthly number so far for this year - then nonfarm payrolls would have been more than 400k...
Tuesday, November 26, 2013
Musings on Minnesota Macro by Krugman
Minnesota Fed President and Research Department by Thoma
Edit: added No, I Do Not Know What Is Going on at Minneapolis Fed Research... by DeLong
Monday, November 25, 2013
That may be a bit of an overstatement, but the comments from Yi Gang, a deputy governor at China's central bank, deserved much more attention than they received. According to Bloomberg, YI announced that the bank would no longer accumulate reserves since it does not believe it to be in China's interest. The implication is that China's currency will rise in value against the dollar and other major currencies.
This could have very important implications for the United States since it would likely mean a lower trade deficit. Since other developing countries have allowed their currencies to follow China's, a higher valued yuan is likely to lead to a fall in the dollar against many developing country currencies. A reduction in the trade deficit would mean more growth and jobs. If the deficit would fall by 1 percentage point of GDP (@$165 billion) this would translate into roughly 1.4 million jobs directly and another 700,000 through respending effects for a total gain of 2.1 million jobs.
Since there is no politically plausible proposal that could have anywhere near as much impact on employment, this announcement from China's central bank is likely the best job creation program that the United States is going to see. It deserves more attention than it has received.
Friday, November 22, 2013
Over at Crooked Timber, Daniel Davies Turns into an Internet Troll... by DeLong (repost from 2011)
Why did they do this? It wasn't because, as Daniel claims, of "the disappearance of a huge amount of household sector wealth. It did disappear. But wealth had disappeared before--remember Black Monday on the stock market in 1987, or the collapse of the dot-com boom?--without it triggering a Lesser Depression. It was because people recognized that banks that were supposed to have originated-and-distributed mortgage-backed securities had held on to them instead, that as a result a large chunk of the $500 billion in subprime losses had eaten up the capital base of highly leveraged financial institutions, and that you were running grave risks if you lent to a bank. The run on the shadow banking system that followed was the source of the crash as financing for exports and for equipment investment vanished, and then the whole thing snowballed.It seems the disagreement is short-term versus long-term crisis. DeLong says it was a short-term crisis caused by a "seize up" that turned into a long-term crisis because of inadequate policies. Davies agrees their have been inadequate policies since the crisis, but wrong-headed policies before the crisis helped bring on the crisis.
No banks losing track of the risks they were running and holding on to assets that were supposed to be originate-and-distribute, no financial crisis, no credit crunch, and no Lesser Depression. The housing bubble would have deflated, unemployment would now be near 5%, exports would have boomed, and our biggest worry right now would probably be a "weak dollar".
When Thought Experiments Encounter the Unthinking by Krugman
Bonus Thursday Idiocy Department: Clive Crook Misreports Larry Summers by DeLong
Thursday, November 21, 2013
The account said that most officials were open to the idea of encouraging bank lending by reducing the interest rate on funds that banks keep on deposit with the central bank. Those reserves have ballooned with the Fed’s bond purchases, because the Fed buys bonds from the banks and then credits their reserve accounts.
The Fed currently pays annual interest of 0.25 percent on bank reserves, which sounds like a pittance but cost $199 million in 2012. Officials have described the payments as a way of keeping inflation under control, because the reserves stay at the Fed. But with inflation sagging, economists including Princeton University’s Alan Blinder have argued that the Fed should revisit its priorities.
The account the Fed released on Wednesday said the idea “could be worth considering at some stage,” though it noted the benefits were likely to be small.
Janet L. Yellen, President Obama’s nominee to lead the Fed for the next four years, said at her confirmation hearing last week that the idea “certainly is a possibility.” She added, however, that officials remain concerned that a rate cut would disrupt financial markets. Keeping the interest rate on reserves above zero, for example, has created an incentive for banks to borrow from money market funds and then deposit the money with the Fed. In the absence of those payments, the money funds might actually be forced to pay the banks to take that same money.
“We’ve worried that if we were to lower that rate to close to zero, we would begin to impair money-market function,” Ms. Yellen said at the hearing.
Wednesday, November 20, 2013
Do Negative Rates Call For a Permanent Expansion of the Government? by Mike Konczal
Social Security and Secular Stagnation by Krugman
But at this point there’s enough information coming in to make semi-educated guesses — and it looks to me as if this thing is probably going to stumble through to the finish line. State-run enrollments are mostly going pretty well; Medicaid expansion is going very well (and it’s expanding even in states that have rejected the expansion, because more people are learning they’re eligible.) And healthcare.gov, while still pretty bad, is starting to look as if it will be good enough in a few weeks for large numbers of people to sign up, either through the exchanges or directly with insurers.People's memories are short. If it's fixed by the spring people will have all summer to forget. The Republicans probably won't want to change the subject to shutting down the government again.
If all this is right, by the time open enrollment ends in March, millions of previously uninsured Americans will in fact have received coverage under the law, and reform will be irreversible. Obama personally may never recover his reputation; Democratic hopes of a wave election in 2014 are probably gone, although you never know. But anyone counting on Obamacare to collapse is probably making a very bad bet.
The point is that the case against austerity is as strong as it ever was.
And maybe even stronger, once you think about debt dynamics.
Right now the real interest rate on US government borrowing is about 0.5 percent on 10-year securities, negative 0.4 percent on 5-year. Meanwhile, even pessimistic estimates of US potential growth put it in the 1.5-2 percent range. So r is less than g — the real interest rate on debt is less than the normal growth rate.
This in turn means that the usual worry about a rising debt level — that it will require that we eventually run big non-interest surpluses to pay down the debt — is all wrong. As long as we run a primary (non-interest) balance, or in fact not too large a deficit, the debt/GDP ratio will tend to erode over time. What’s more, an increase in the primary deficit won’t cause a runaway debt spiral, it will lead to a gradual rise in debt to a higher level, but it will stabilize there.
Suppose, for example, that r is 0.5 and g is 1.5 — not too unrealistic. Suppose that you start with debt at 50 percent of GDP, and then begin running primary deficits of 1 percent of GDP. What will happen? Debt will rise to 100 percent of GDP, and stay there, even if nothing is done to address the deficit.
I don’t want to push this too hard, but I just want to make it clear that if we really believe in low or even negative normal real interest rates, conventional views of fiscal prudence make even less sense than people like me have been saying.
So fear not: I’m still bitterly against austerity, and even less impressed by the fiscal scolds than before. Secular stagnation just adds to the reasons to believe that we’re doing things very, very wrong.
Tuesday, November 19, 2013
“It’s a lot harder than you’d think to find Republicans who’d actually want to cut entitlements, or Democrats who want to raise taxes,” said Jared Bernstein, a former economic adviser to Vice President Joseph R. Biden Jr. and now a senior fellow at the liberal Center on Budget and Policy Priorities. “The only person who seems to have consistently been interested in a grand bargain is the president, and frankly I’m not even sure about him.”
Mr. Obama put the proposed changes to entitlement programs in his budget, including one that would reduce annual cost-of-living benefits for Social Security, over his party’s opposition. His hope was to entice Republican leaders back to the bargaining table, or at least to expose their unwillingness to compromise. Republicans were not enticed.
“One of the big differences between budget discussions now and previous ones back to the ’80s is that I’m not sure anyone here really wants to cut a deal,” said Stan Collender, a longtime fiscal policy analyst and the national director of financial communication at Qorvis, a public relations firm.
“Do Republicans want to propose changes in entitlements?” he added. “Basically you’re talking about Medicare and Social Security, which a lot of Tea Party folks get, given their ages. Do Democrats want to propose changes in taxes for upper-income individuals? Well, given the support they’re getting from upper-income individuals, I’m not sure they want to take the lead on that.”
The declining deficit reflects economic growth as well as the spending cuts and tax increases that Mr. Obama and Congress previously agreed to. It is not expected to begin climbing again until about 2018, as more baby boomers draw from Medicare, Medicaid and Social Security. With the unemployment rate stuck above 7 percent, Democrats are more interested in increasing spending for programs like public works and education, and ending the sequestration cuts, which economists say are costing hundreds of thousands of jobs.
Monday, November 18, 2013
Sunday, November 17, 2013
Paul, Larry, Secular Stagnation, Sand the Impact of Negative Real Rates by Jared Bernstein
Krugman blogged about the same themes as Summers's radical IMF presentation back in September.
Me Too! Blogging by Krugman
Bubbles, Regulation, and Secular Stagnation by Krugman
The trouble with this line of argument is that if monetary policy is assigned the task of discouraging people from excessive borrowing, it can’t pursue full employment and price stability, which are also worthy goals (as well as being the Fed’s legally binding mandate). Specifically, since the US economy shows no signs of having been overheated on average from 1985 to 2007, the argument that the Fed should nonetheless have set higher rates is an argument that the Fed should have kept the real economy persistently depressed, and unemployment persistently high – and also run the risk of deflation – in order to keep borrowers and lenders from making bad decisions. That’s quite a demand.
Many of us would therefore argue that the right answer isn’t tighter money but tighter regulation: higher capital ratios for banks, limits on risky lending, but also perhaps limits for borrowers too, such as maximum loan-to-value ratios on housing and restrictions on second mortgages. This would guard against bubbles and excessive leverage, while leaving monetary policy free to pursue conventional goals.
Or would it?
Our current episode of deleveraging will eventually end, which will shift the IS curve back to the right. But if we have effective financial regulation, as we should, it won’t shift all the way back to where it was before the crisis. Or to put it in plainer English, during the good old days demand was supported by an ever-growing burden of private debt, which we neither can nor should expect to resume; as a result, demand is going to be lower even once the crisis fades.
The Long and Large Shadows Cast by Financial Crises: The Future of the European Periphery in the Mirror of the Asian Pacific Rim 1997-98 by DeLong
And yet that is not what happened. On the Asian Pacific Rim in 1997-8, the fact that so much of the region’s debt was denominated in dollars meant that bouncing the value of the currency and thus of domestic production down far enough raised universal and valid fears of bankruptcy, and sharply raised risk premia: the Asian Pacific Rim thus had to, to a certain extent at least, defend its currency. And in Europe’s periphery nations are tied by treaty, by the deep and close technical integration of the financial system, and by hopes for a united and peaceful European future into the euro zone. Thus when the crisis comes both regions must generate rapid adjustment of the current account: a sudden stop.
The problem is general. There are lots of reasons why the natural market’s bounce-the-value-of-the-currency-down adjustment mechanism will not work. Overwhelming reasons to maintain a fixed parity. High levels of harder-currency debt. A tight coupling of import prices to domestic inflation and a belief that the costs of accepting domestic inflation are unacceptable–cough cough, why we all today feel sorry for Raghu Rajan. In any of these cases, when the crisis comes you must generate a rapid adjustment in your current account, and the easiest and the most straightforward way to do this are via domestic investment collapse. This is the first failure of the veil of the financial system to be merely a veil–the first coupling of financial distress to destructive real economic consequences.
Saturday, November 16, 2013
Bubbles Are Not Funny by Dean Baker
Bubbles, Regulation, and Secular Stagnation by Krugman (Sept. 25, 2013)
Need to increase demand to achieve full employment without bubbles or above moderate inflation. Inflation will help with deleveraging. Increase demand via more exports. Via monetary policy (see Abenomics). Via fiscal policy. State and local governments are now small tailwind. Federal has the sequester but deficit/debt no longer and issue so probably less austerity going forward. Via supply (shorter hours) and organized labor.
The good news for 2014 is that those headwinds--the ones we know about--are already priced in. U.S. government spending cuts and tax hikes took place, but there aren't likely to be additional ones next year. Emerging markets continue on their moderate growth path, but there doesn't seem to be a collapse in activity. Europe's problems may have finally bottomed out, and its sense of acute crisis has long passed.State and local governments are a slight tailwind.
In other words, the forseeable things that dragged down growth the last few years look unlikely to recur. So the good news is that the natural resilience of the world's leading economies should have a greater ability to assert itself, driving the kind of expansion embedded in projections from the IMF, the Fed, and presaged by the new OECD numbers.
Many false dawns however, as Irwin notes. How hard did the sequester hit the economy?
Friday, November 15, 2013
15 November 2013 06:09
The Money Trap by Krugman
Nov. 14, 2013
latest German current account balance linklist
Thursday, November 14, 2013
German Trade Balance Isn't About Hard Work by Yglesias
Nov. 14, 2013
Europe’s (Low) Inflation Problem by Krugman
Nov. 13, 2013 9:15 p.m.
German Economists Exist to Make Economists Elsewhere Look Good by Dean Baker
Nov. 13, 2013 14:59
In a Good World, Would We Have to Deal with “Global Imbalances”? by DeLong
Nov. 13, 2013 7:45 a.m.
Germany’s Neighbors Admonish It Over Surplus
Nov. 13, 2013
Pressure Is on Germany to Narrow Its Trade Gap
Nov. 12, 2013
Germany’s Lack of Reciprocity by Krugman
Nov. 12, 2013 1:26 a.m.
Europe’s Macro Muddle (Wonkish) by Krugman
Nov. 11, 2013
Sadowski on sterilization
Nov. 4 at 1:34 pm
How Do Those Germans Do It and What Does it Mean for the US? by Jared Bernstein
Nov 04, 2013 at 12:12 pm
China and the EU: Beggaring Neighbors by Dean Baker
Sunday, 03 November 2013 16:26
Eureka! Paul Krugman Discovers the Bank of France by David Glasner
November 3, 2013
The real problem with German macroeconomic policy by Simon Wren-Lewis
Sunday, 3 November 2013
Blame Germany, or Frankfurt? by Ryan Avent
Nov 3rd 2013, 21:41
Europe’s Inflation Problem by Krugman
November 4, 2013, 10:20 am
The Changing Geography of Beggar-thy-Neighbor by Krugman
November 3, 2013, 3:16 pm
German Surpluses: This Time Is Different by Krugman
November 3, 2013, 6:41 am
Those Depressing Germans by Krugman
November 3, 2013
Is the Paradox of Thrift Actually a Paradox? by Henry Farrell
Nov. 2, 2013
France 1930, Germany 2013 by Krugman
November 2, 2013, 6:00 pm
Sin and Unsinn by Krugman
November 2, 2013, 4:35 pm
Germany's Export Obsession Is Dooming Europe to a Depression by Matt O'Brien
Nov 2 2013, 9:30 am
Defending Germany by Krugman
November 2, 2013, 9:23 am
Fawlty Europe: Will the European Commission dare to utter the unmentionable to the Germans? by Charlemagne (The Economist)
Novemeber 2, 2013
More Notes On Germany by Krugman
November 1, 2013, 4:54 pm
The Harm Germany Does by Krugman
November 1, 2013, 11:41 am
Germany’s Blind Spot by New York Times Editorial Board
October 31, 2013
Raw Nerve: Germany Seethes at US Economic Criticism By Christopher Alessi (Spiegel Online)
October 31, 2013 – 06:26 PM
U.S. Accuses Germany of Causing Instability by Sarah Wheaton
October 30, 2013
Semiannual Report on International Economic and Exchange Rate Policies by U.S. Treasury
October 30, 2013