May of 2009, Rogoff and Mankiw said the U.S. needed more inflation.

"I’m advocating 6 percent inflation for at least a couple of years," says Rogoff, 56, who’s now a professor at Harvard University. "It would ameliorate the debt bomb and help us work through the deleveraging process."

... 
Given the Fed’s inability to cut rates further, Mankiw says the central bank should pledge to produce "significant" inflation. That would put the real, inflation-adjusted interest rate -- the cost of borrowing minus the rate of inflation -- deep into negative territory, even though the nominal rate would still be zero.

If Americans were convinced of the Fed’s commitment, they’d buy and borrow more now, he says.

Mankiw, currently a Harvard professor, declines to put a number on what inflation rate the Fed should shoot for, saying that the central bank has computer models that would be useful for determining that.

Gold Standard

In advocating that the Fed commit itself to generating some inflation, Mankiw, 51, likens such a step to the U.S. decision to abandon the gold standard in 1933, which freed policy makers to fight the Depression.

Faster inflation might be preferable to increased unemployment, or to further budget stimulus packages that push up the national debt, says Mankiw, who was chairman of the Council of Economic Advisors under President George W. Bush.

The White House has forecast that the budget deficit will hit $1.84 trillion this fiscal year, or 12.9 percent of gross domestic product. Rogoff doubts that politicians will be willing to reduce that shortfall by raising taxes as much as needed. Instead, he sees them pressing the Fed to accept faster inflation as a way of easing the burden of reducing the deficit.

Easier Debt Repayment

Inflationary increases in wages -- and the higher income taxes they generate -- would make it easier to pay off debt at all levels.

"There’s trillions of dollars of debt, in mortgage debt, consumer debt, government debt," says Rogoff, who was chief economist at the Washington-based IMF from 2001 to 2003. "It’s a question of how do you achieve the deleveraging. Do you go through a long period of slow growth, high savings and many legal problems or do you accept higher inflation?"

Depends on the Context

Interesting point made by DeLong in one of his Socratic dialogues that he pulled from his archives. Krugman has made this point repeatedly in his columns and blog posts when he says that we're in a "liquidity trap" or unique circumstances. A convenient aspect of the Internet is the ability to go back a year into the archives and see that DeLong and Krugman were proven correct.

DeLong writes:

Adeimantos: Once again back to Hicks (1937). When the unemployment rate is high and the nominal interest rate on Treasury bonds is very very slow, adjustment comes in the form mostly of changes in spending and only slightly in changes in interest rates--the world is then "Keynesian." But when the unemployment rate is normal or low and the nominal interest rate on Treasury bonds is near its normal levels, adjustment comes in the form mostly of changes in interest rates and only slightly in changes in spending--the world is than "Classical." That's why the title of the article is "Mr. Keynes and the 'Classics'."

After the New Economy

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public," wrote Adam Smith in The Wealth of Nations, adding, "or in some contrivance to raise prices."

The New York Times reports "Tech Firms Said to Be in Talks to Settle Inquiry Over Recruiting."

SAN FRANCISCO -- A number of Silicon Valley companies including Apple, Google and Intel are in advanced negotiations with the Justice Department to avoid facing charges that they violated antitrust laws by agreeing not to poach employees from each other, according to two people briefed on the negotiations.

A settlement would end an investigation that began more than a year ago over concerns that such agreements would have the effect of holding down wages. While the talks are in advanced stages, they could still fall apart, as one or more companies may refuse to sign on to a settlement, said the people briefed on the talks, who agreed to speak on the condition of anonymity because the talks were confidential.

The terms of any proposed settlement could not be learned.

The employment market in Silicon Valley is among the most competitive in the country, and job hopping of engineers and other employees among the companies under investigation, which also include Adobe Systems and Intuit, is common. The companies were being investigated over agreements not to recruit each other’s employees.

Representatives of Apple, Google, Intel and Intuit all declined to comment. A spokeswoman for Adobe did not immediately respond to a request for comment. A Justice Department spokeswoman declined to comment.

News of the settlement talks was first reported Friday in The Wall Street Journal.

The initial Justice Department investigation was broader, involving Microsoft and Yahoo. But both said that they were no longer part of the inquiry.

"Last year, following its investigation and detailed review of materials produced by it, Yahoo was advised by the department that it did not intend to bring a case against Yahoo," May Petry, a Yahoo spokeswoman, said in a statement. A Microsoft spokesman said that the company was not part of the investigation.

A settlement would avert a lawsuit that would be risky for all involved. To win its case, the Justice Department would have to show not only that the companies had agreements not to actively recruit each other’s workers, but also that those agreements held down wages.

The companies have privately argued that such agreements are necessary to allow them to collaborate without the risk of losing their best employees to one another. But that argument might not have prevailed in court, and a loss could have exposed them to further litigation.

The close ties between some of these companies, especially Google and Apple, have been the subject of other antitrust investigations in the last year.

And this has been another edition of "Scapegoating during the Slump"

In America it's the "wetbacks" and Muslims. In Europe, it's the Muslims and Roma or "Gypsies." In England, it's the "Polish plumber."

The Chinese Communist Party deserves criticism, however. In other words they aren't being "scapegoated."

(A "New Beginning" indeed)

War on Poverty Over: Poverty Won.

Financial Times reports  "US workers’ poverty reaches 50-year high."

Poverty among the working-age population of the US rose to the highest level for almost 50 years in 2009, as the human cost of the deepest economic downturn since the Great Depression was laid bare in new census data.

Poverty among those aged 18 to 64 rose by 1.3 percentage points to 12.9 per cent -- the highest level since the early 1960s, prior to then-president Lyndon Johnson’s "War on Poverty. The overall poverty rate rose by 1.1 percentage points to 14.3 per cent, the highest since 1994.

Whereas the New York Times reported a 15-year high? According to Census data? Note the difference in the links.

Again you have to wonder about the efficacy of Bill Clinton's triangulating "welfare reform." Three members of his administration resigned over the signing of the "Personal Responsibility and Work Opportunity Act."

It was part of the reason I was for Nader against Gore and for Obama against Hillary, even if Obama has said welfare "reform" was a good thing.

Update: The Financial Times reports poverty "among those aged 18 to 64" is at a 50-year high. They don't say it, but much-maligned Social Security seems to have blunted poverty amongst those over 64, something the Catfood Commission intends to remedy.

More Inflation Please

Washington Post journalist extraordinaire Neil Irwin is on a roll.

Dean Baker is shocked and awed by the high quotient of truth content in Irwin's Post piece titled "How a touch of inflation could boost the economy." (Baker usual spends his blog time correcting the various, erroneous memes the Post is spreading about the economy. Inevitably it is on the wrong side of the debate.)

Consumer prices rose 1.2 percent over the 12 months that ended in August, the Labor Department said Friday, and only 0.9 percent when volatile prices for food and energy are excluded. That is well below the range of 1.5 to 2 percent sought by the Federal Reserve.

The low inflation numbers reflect the reluctance of businesses to raise prices amid weak demand for their products and the inability of most workers to get raises at a time of high unemployment.

Somewhat higher inflation could strengthen the ailing economy. Inflation would make the heavy debt that Americans carry a bit more manageable as wages rise but the amount owed stays the same. And it would create more incentive for businesses to invest their cash rather than sit on it, because inflation would reduce the value of hoarded money.

Some economists fear outright deflation, a destructive, self-reinforcing cycle of falling prices that can cause a long period of economic misery.

Baker adds "Of course the article did not go so far as to mention the idea of the Fed deliberately targeting a higher inflation rate in the range of 3-4 percent. This policy has been advocated by such well-known radicals as Greg Mankiw, President Bush's former top economic advisor, Olivier Blanchard, the chief economist at the IMF, and Federal Reserve Board Chairman Ben Bernanke." Krugman, DeLong, Yglesias and others have advocated this also.

The IMF seems to be getting better in its analysis, as pointed out here by Krugman. He notes the OECD has also done an about face.

Jacobin magazine has

an interview with Azar Nafisi

a review of Thomas Geoghagen's new book Were You Born on the Wrong Continent?

(Doug Henwood liked the editor's piece on the Zapatistas.)

Mental Health Break



What I like about Andrew Sullivan is that he does a Mental Health Break post every other day.

Yglesias points to a new paper by Gary Gorton. Here's the abstract:

The "shadow" banking system played a major role in the financial crisis, but was not a central focus of the recent Dodd-Frank Law and thus remains largely unregulated. This paper proposes principles for the regulation of shadow banking and describes a specific proposal to implement those principles. We first document the rise of shadow banking over the last three decades, helped by regulatory and legal changes that gave advantages to the main institutions of shadow banking: money-market mutual funds to capture retail deposits from traditional banks, securitization to move assets of traditional banks off their balance sheets, and repurchase agreements ("repo") that facilitated the use of securitized bonds in financial transactions as a form of money. All of these features rely on an evolution of the bankruptcy code that allows securitized bonds to be used as a form of privately created money in large financial transactions, a usage that can have significant efficiency gains and would be costly to eliminate. History has demonstrated two successful methods for the regulation of privately created money: strict guidelines on collateral (used to stabilize national bank notes in the 19th century), and government-guaranteed insurance (used to stabilize demand deposits in the 20th century). We propose the use of strict rules on collateral for both securitization and repo as the best approach for shadow banking, with compliance required in order to enjoy the safe-harbor from bankruptcy.

Ben Bernanke testified to the Financial Crisis Inquiry Commission that Gorton is worth reading on the subject of the crisis.

Yglesias mentions Gorton's book Slapped by the Invisible Hand.

Recession raises poverty rate to 15 year high.

Well Clinton's "welfare reform" sure seems to be working!

At least his triangulations helped get Democrats like Al Gore and Hillary elected to the Presidency. Oh wait...

Glenzilla is just wrong in this post. 

As Atrios responded -- and I couldn't agree more -- Tea Party extremism isn't an aberration from what the GOP has been; it's perfectly representative of it, just perhaps expressed in a less obfuscated and more honest form.

No, if the Tea Party had been in charge they wouldn't have passed TARP and we'd currently have 30 percent unemployment and all that entails. How can Greenwald and Atrios be so flip and unserious? In my opinion it's because they have become thoroughly embittered for various reasons and they enjoy being hyperbolic.

George H.W. Bush raised taxes and paid for it. The Tea Party will never raise taxes. In her book the Dark Side, Jane Mayer discussed the various conservatives who fought Cheney and Addington over checks and balances on the executive branch.

What makes things confusing is that the Tea Party is essentially astroturf, a corporate and rich person-sponsored entity and not a grass roots phenomenon. (To the extent it has been grass roots, I would bet it's because the unemployment rate is at 9.5 percent. And the crazies always come out when there's a liberalish President.) Granted, the Republican party has been extreme in its opposition to Obama, that is refusing to compromise on anything. For example, they refuse to compromise at all about confirming Obama's nominees to the Federal Reserve or Elizabeth Warren or Dawn Johnson to the OLC, etc. Since Obama won the election, he should be allowed to govern. That's how democracy is supposed to work.

Glenzilla and Atrios don't know how to make distinctions. Either that or they just dishonestly refuse to. For example like other anti-war types they can't distinguish between George W. Bush and Osama bin Laden or Saddam Hussein. Partly it's an overreaction to the conservative right and partly it's because is some way they're spoiled and refuse to acknowledge the stakes.

Glenzilla says

A Washington political/media culture that rolls out the red carpet for every extremist Bush official is now suddenly offended by these Tea Partiers' extremist views?  Please. 

This is his target. Plus moderate liberals who see some value in Senators like Collins and Snowe even though the Maine Senators along with mainstream Democrats went along with the most egregious Bush administration post-911 policies.

The Tea Party candidate for the Delaware Senate seat is a religious nut named Christine O'Donnell who believes "homosexuality is an identity disorder." Glenzilla dishonestly fails to mention this which is surprising given that he is gay.

He does mention Jesse Helms:

During the Clinton years, Jesse Helms was the Chairman of the Foreign Relations Committee and threatened the President not to go on Southern military bases lest he be killed.

Yeah but he was from North Carolina. John Ashcroft and Tom Coburn are nuts too, but this is Delaware, not Missouri or Oklahoma. Plus Helms wasn't part of a "movement," he was a lone nutcase.

Update: After some consideration I think the issue is that in back in the "bad old days" Helms atavistic views weren't as rare among the population. Whereas today, you have movies like "The Kids Are All Right," you have Hillary Clinton as a viable Presidential candidate and Barack Hussein Obama as the leader of the Free World. So it's more that the country has moved which makes the Tea Party seem more crazy relatively speaking. Glenzilla may have a point on the class issue. Establishment Republicans should know better, but then Christine O'Donnell isn't poor compared to, say, a starving Afghan, Pakistani or African.

Glenzilla and Atrios are being patronizing in other words.

Excellent journalist Neil Irwin at the Washington Post writes about the Fed meeting next week.

These measures are likely to be the focus of a vigorous debate at a Fed policy meeting next week, setting the stage for a definitive decision in November or December on whether to purchase hundreds of billions of dollars of bonds in an effort to strengthen the economy. No action is likely at the policy meeting scheduled for Tuesday, which means monetary policy could remain in a holding pattern until the Fed committee reconvenes later in the fall.

Fed policymakers face two major questions: Will the weak economic recovery of the past few months persist through 2011? And would pumping vast new sums of money into the economy pack enough punch to be worth the risks?

Top Fed officials will be preparing formal forecasts for the economy over the coming years in advance of their meeting Nov. 2 and 3. If their consensus is that growth will be too slow next year to bring down the unemployment rate significantly, they will be more inclined to take action, even if the exact economic impact is modest and hard to predict, according to analysts who study the Fed.

I think there is no question growth will be too slow next year. The stimulus will end soon. Maybe they will wait until after the election.

The Recent Clusterfuck and the Ongoing Unpleasantness

DeLong has some thoughts on the recent crisis and slump here and here.

It's too bad more bloggers haven't engaged Robin Wells and Paul Krugman's "The Slump Goes On: Why?", their article in the New York Review of Books.  Maybe they are waiting for the second part. There were some comments at Krugman's New York Times Blog.

I summed it up here. Here, I focused on the books and authors Wells and Krugman were ostensibly critiquing.

This time I'll focus on the way they structured the article. There's a prologue of sorts and then two sections or parts set off by the numbers 1. and 2. Section 1 is broken up by subheadings. Wells and Krugman use an international context which is helpful in combating erroneous ideas.

The prologue explains what they're doing and what their general thoughts are on the matter. What caused the financial panic and tight credit was the bursting of the housing bubble. The first four headings under Part 1 are each of the popular explanations. Three of them are wrong, one is correct.

1) Loose monetary policy: the Fed held rates too low for too long in the past decade. Wells and Krugman point out that this is wrong. The Fed was responding to a slowdown at the beginning of the decade and there was a housing bubble in Britain, Spain, and Ireland as well. The European Central Bank didn't follow a loose policy as the Fed did.

2) The global savings glut. Wells and Krugman believe this is correct and helps explain the fact that the bubble wasn't contained to just the United States. Bernanke gave a speech in 2005 outlining the ideas behind the concept of the global savings glut.Wells and Krugman write:

Historically, developing countries have run trade deficits with advanced countries as they buy machinery and other capital goods in order to raise their level of economic development. In the wake of the financial crisis that struck Asia in 1997-1998, this usual practice was turned on its head: developing economies in Asia and the Middle East ran large trade surpluses with advanced countries in order to accumulate large hoards of foreign assets as insurance against another financial crisis.

Germany also contributed to this global imbalance by running large trade surpluses with the rest of Europe in order to finance reunification and its rapidly aging population. In China, whose trade surplus accounts for most of the US trade deficit, the desire to protect against a possible financial crisis has morphed into a policy in which the currency is kept undervalued, which benefits politically connected export industries, often at the expense of the general working population.

For the trade deficit countries like the United States, Spain, and Britain, the flip side of the trade imbalance is large inflows of capital as countries with surpluses bought vast quantities of American, Spanish, and British bonds and other assets. These capital inflows also drove down interest rates--not the short-term rates set by central bank policy, but longer-term rates, which are the ones that matter for spending and for housing prices and are set by the bond markets. In both the United States and the European nations, long-term interest rates fell dramatically after 2000, and remained low even as the Federal Reserve began raising its short-term policy rate. At the time, Alan Greenspan called this divergence the bond market "conundrum," but it’s perfectly comprehensible given the international forces at work.

Bernanke noticed the conundrum too, but both he and Greenspan missed the housing bubble.  Maybe the "conundrum" was a sign?

3) Out of control financial innovation. Wells and Krugman don't believe this was essential because it wasn't as bad in Europe, which suffered similarly. However I would guess that the financial gimmickery helped disguise what was going on and helped the ratings agencies become complacent. Also this seems to be tied in with Minsky's theories which they discuss at the end of the article.

4) Moral hazard created by the GSEs. Wells and Krugman dismiss the common arguments of conservatives by pointing out that private actors like Countrywide Financial and negligent regulators created the subprime fiasco. Fannie and Freddie were latecomers.

The fifth subheading of section one is titled "The Bubble as a White Swan" and points out that bubbles are more common than one would guess, given the way almost everyone missed the most recent bubble.

In Section/Part 2, they discuss Minsky's theories about how in periods of stability people become less risk averse and how after a bubble bursts you can get a "balance sheet recession." This didn't happen with the tech stock bubble at the end of the 1990s, but it did happen with the real estate bubble in Japan with non-financial corporations and it did happen most recently with American household debt and the decline in housing prices.

In the next article, Wells and Krugman will discuss what needs to be done.

Work as if you lived in the early days of a better nation. -- Alasdair Gray.

Human kindness has never weakened the stamina or softened the fiber of a free people. A nation does not have to be cruel to be tough. -- Franklin D. Roosevelt


Star Shock  The disproportionate way that meeting celebrities feels slightly like being told a piece of life-changing news. (From Douglas Coupland's dictionary of the near future.)


I've never been keen on aphorisms, but the two above are pretty good. The first comes from Ken McLeod's blog Early Days of a Better Nation, whose title is inspired by the Gray quote and by the following:

If these are the early days of a better nation, there must be hope, and a hope of peace is as good as any, and far better than a hollow hoarding greed or the dry lies of an aweless god.

-- Graydon Saunders

I had some star shock moments this summer. At the beginning of the summer I saw a She & Him concert at the Jay Pritzker Pavillion. She & Him is Zooey Deschanel  and M. Ward. Then I saw an event at the University of Chicago with James Fallows, Tom Geoghagen and Rick Perlstein. Next at the Printers Row Book Fair I saw Barabara Ehrenreich who discussed what she encountered while undergoing treatment for breast cancer. Before her, I had witnessed Christopher Hitchens's last public appearance before he learned he had cancer of the esophagus. This past Monday I saw Pavement play at the Jay Pritzker Pavillion. Penny Pritzker was the head of the Obama campaign's finance committee.

Martin Wolf: Basil rules not enough

Two years ago today, Lehman Brothers filed for bankruptcy.

Barry Ritholtz says the worst of the housing correction is behind us.

Prices certainly can fall much further; it is possible. However, I am making (what I believe is) a higher probability argument due to fair value. My basis for saying the worst is likely over are prices: We are off 33% from the peak, and as of the end of Q1, were ~5-15% over fair value by traditional metrics.  So a return to fair value -- even a 15% drop in 2011 -- still means the worst is (was) behind us.

If houses were to careen far below fair value -- they were about 40% overvalued, so in theory, they could overshoot 40% to the downside -- then my valuation thesis would be wrong. There are lots of ways house prices could drop much further: If jobs and income plummet from here, home prices will be too high. If interest rates spike, prices will adjust downward. If the mortgage deduction were to be eliminated, prices fall also. IMO, these are smaller possibilities -- say 20-25% chance -- then merely mean reverting towards historic relationships with median income, cost of renting, and home equity as a percentage of GDP.

(via Ezra Klein)

Michael Tomasky on the filibuster

The International

Felix Salmon on Basel III.

(via Yglesias)