Demand Management

Noah Smith's contention that Japan is merely talking down the yen is thought-provoking, as is the commentary Yglesias has been writing. For example:

Currency Wars Aren't Zero-Sum

In a demand-deficient environment, currency wars would help. Perhaps in the far off distant future a sane IMF and WTO would weigh in so nations wouldn't go overboard.

Currently:

1) the US has a large output gap, high unemployment and low inflation

2) Japan is stuck in a deflationary rut

3) Europe also is treading water

4) China is sucking out demand of 1-3 by keeping its currency low.

1-3 have 4 options of adding demand to their economy.

1. Take from creditors/savers and give to debtors via inflation.
2. take from rich nationals and give to the government to spend via fiscal policy. Deficit spending would be taking for future generations.
3. devalue/bring your currency to down to take from foreign exporters and give to national exporters. This would also hurt savers as their savings is devalued and can purchase less from foreign exporters. It is more politically feasible than merely taxing rich nationals in that the rich are a powerful political constituency
4. there's the expectations channel which is more tricky. Investors move their money to riskier investments because of expectations of rising inflation and economic growth. See 1 above.

A future super-combo IMF-WTO global demand management institution could adjudicate a currency war.

The more inflation one had and the more progressive a tax system, the less one would have to depend on exports. 

Once a nation had closed the output gap and had full employment, it would no longer be allowed to manipulate its currency.

Should Japan Reflate? by Noah Smith

In the comments

• Absalom: "The Japanese unemployment rate is apparently 4.1%. There may be little that can be done through monetary easing that would make much difference. My understanding is that one of the things holding the Japanese economy back is that the domestic economy is heavily regulated. De-regulating the domestic economy might be a way to bring some dynamism to the economy (but at the potential cost of increased unemployment)."
• Noah Smith: "Once again, Absalon and I are in complete agreement...Absalon, you hereby win "commenter of the month"..."
• Me: "I'm a complete amateur and find the discussion thought-provoking.
  
  If the unemployment rate is so low, wouldn't talking down the Yen be inflationary as the export sector picks up and looks to hire more workers? Or would they just add more robots?"

What's Going To Matter In 2013 by Yglesias

Japan: If Shinzo Abe can bring Rooseveltian resolve to Japan and break the back of deflation, it'll be important not just for the world's #3 economy but as an example to the rest of the developed world. Noah Smith, who knows Japan much better than I do, says we shouldn't put our faith in Abe who's really just an ugly nationalist and not any kind of monetary policy wonk. I would say there's no contradiction there. The ugly nationalists running Japan in the 1930s were the first to ditch gold and beat the recession. Adolf Hitler ran a very intelligent and forward-thinking monetary policy regime. Sometimes it takes a national security hawk to beat the inflation hawks. That said, if the upshot is an invasion of Manchuria and a sneak attack on Hawaii we may end up missing the good old days of prolonged Japanese economic stagnation.

Smith seems to have rewritten his blog post ("OK, maybe I'm wrong. I'm no expert in Japanese politics, just a guy who has been reading about the LDP for a long time. If Abe follows through on his radical monetary proposals, I'll gladly eat crow. But think of it this way. ") and has a second update:

Update 2: I think Reddit puts it very succinctly by saying: "Shinzo Abe isn't reading Scott Sumner, he just wants a return to Japanese mercantilism." That's exactly it. A mercantilist in monetarist's clothing.

And then weirdly Smith seems to be agreeing with Yglesias in a new post "Should Japan Reflate?"

Now, I've gone on the record as a skeptic regarding the power of central banks to fine-tune the macroeconomy. In that post, I mentioned the idea of an inflation "snap-up", where expansionary monetary policy suddenly and unpredictably pushes inflation from very low to problematically high. Also, I've cast doubt on the idea that Shinzo Abe, the current hero of the Japanese "reflationist" camp, is really committed to following through on the radical changes he's proposed. 

Still, I think that if Japanese politicians and policymakers were willing to try a big push for reflation, it would be a good idea.

IN THE ROUGH: Rihanna’s strange kind of fame. BY SASHA FRERE-JONES

ABSTRACT: POP MUSIC about Rihanna. Everything that the twenty-four-year-old R. & B. star Rihanna does comes with something extra: enormous numbers, awkward questions, unconfirmed stories, unclaimed responsibilities. Rihanna has sold more digital copies of her work than any other artist, including the Beatles. Her current No. 1 single, “Diamonds,” off her seventh album, “Unapologetic,” is her tenth. But all her accomplishments are sometimes overshadowed by her relationship with Chris Brown. Describes Brown’s assault on her, and its aftermath. It’s very hard to find a consistent Rihanna in any of her music. She has been, wisely, a carpetbagger from the beginning. Her voice isn’t particularly compelling; it conveys not emotion, but, rather, a position of powerful detachment. There’s so much Auto-Tune applied to her voice that it’s hard to say how she does or doesn’t sing. What she has done to remain a pop star is to choose very well-written songs.

Bernanke Helps the Economy and the Masses with Low Interest Rates by Dean Baker

William D. Cohan, a columnist for Bloomberg View, is the author of “Money and Power: How Goldman Sachs Came to Rule the World” and “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.”

Baker rightly calls Cohan's op-ed bizarre.

AND JON HILSENRATH OF THE WALL STREET JOURNAL GETS ONE WRONG... by DeLong
Gauging the Guidance That Models Give the Fed by John Hilsenrath

The financial gaps in the models worry Nathan Sheets, a Citigroup economist who was Mr. Bernanke's top international adviser at the Fed from 2007 to 2011. Mr. Sheets points to 1994 as an example of why. Back then, small increases in short-term interest rates by the Fed led to a surge in long-term interest rates. The models didn't foresee the financial chaos that would ensue, including the collapse of investment bank Kidder Peabody & Co., the bankruptcy of Orange County, Calif., and the Mexican peso financial crisis…

 Because Citigroup has such a great track record. Sheets is arguing the same thing Cohan is.

DeLong writes:

Mr. Sheets's warning certainly warrants attention if you are a hedge fund or an investment bank thinking of replicating Kidder Peabody's or Orange County's portfolio--but you should have already known not to do that. 

But should Mr. Sheets's warnings have led the Federal Reserve to do something different than it has done? In retrospect the Federal Reserve certainly wishes that it had given more guidance at the start of 1994 as to the likely shape of its interest-rate tightening cycle and that it had at the start of 1994 incorporated the endogenous duration of MBS into its models in the way that it had incorporated them by the end of 1994. However, if the employment and output recovery evolves going forward as the recovery of the 1990s evolved in 1994 and thereafter, the Federal Reserve will be not dismayed but ecstatic.

The fixed-income lobby? The 1990s ended with a stock bubble however. And we had the East Asian financial crisis in 1997.

 

Lucky/smart actors: Giovanni Ribisi in Sofia Copolla's "Lost in Translation" shared scenes with Scarlett Johansson and Anna Faris. Paul Rudd and Adam Scott got to work with Elizabeth Banks, Zooey Deschanel,  and Rashida Jones in "Our Idiot Brother."

Central Planners

Wikipedia articles on:

Economy of Nazi Germany

Economy of the Soviet Union

The New Deal

commenter at DeLong's blog writes

Bob isn't quite as crazy as Greenspan though. Greenspan would say, "It is unfortunate that we haven't had 10% inflation because the markets might stop expecting inflation, producing a sense of complacency, and could render them ill-prepared when it does happen." 

Translation: "The markets are wrong." Perhaps he wants to use 'central planning' to force people out of bonds... oh, wait... that is what the debt ceiling default is for! The Republicans are central planners who wish to plan the end of the USA.

 It is ironic when libertarians say that the infallible market is wrong. It is quite often wrong as DeLong and Krugman point out, even if they take the market more seriously than glibertarians do.

Markets can be subject to panic (see 2008) and bubbles (pre-2008). As Yglesias writes in a thought-provoking post in the context of Shinzo Abe and the LPD's landslide election:

From time to time sheer economic desperation will give us a Junichiro Koizumi or a Franklin Roosevelent but Koizumi didn't last and FDR plunged the country back into recession in 1937 with contractionary policy. Foreign policy crisis is the main thing that drives a national establishment toward heterodoxy and growth. Nobody tried to finance either world war on a sound money basis, and in most respects Keynesian theory followed wartime practice rather than vice versa.

The Signal of Inflation Expectations and the Noise of Everything Else

ROBERT MURPHY'S BET THAT INFLATION WAS JUST AROUND THE CORNER HAS GONE ABSOLUTELY HORRIBLY WRONG by DeLong

During the housing bubble, inflation was under control. What was needed (and will be needed) were anti-bubble-blowing policies on taxes and regulations. Bernanke contends that the Fed didn't blow the bubble, but as Dean Baker and others point out they could have talked it down.

Questions for Joe Gagnon: What is Quantitative Easing, Does it Work, and Should We Do QE3? by Mike Konczal (June 14,2011)

MK: So did QE2 work? And if so, how can you tell? 

JG: It did work. I think QE2 had two elements. One element was of moderate importance, one element was of minor importance. The moderate one is that QE2 convinced markets that the Federal Reserve would not allow deflation or a double dip recession to happen. This is good because it inspired confidence and kept inflation expectations from falling any further. That was the most important step, because it convinced financial markets that the United States wouldn't turn into Japan, which they were worried about. The element of minor importance was that it lowered long-term bond rates a little bit. It takes a lot of purchases to move these interest rates even a little bit, and QE2 wasn't big enough to move them dramatically. It's not nothing, but it is small in the scheme of things.

...
MK: So how do you know that QE has worked? What kind of studies are conducted, and how do they draw their conclusions? 

JG: I have a paper that looked at two things. When the Fed made announcements on QE1, what happened to bond yields? Yields on the things the Fed was buying went way down, but yields on things the Fed wasn't buying also went down. All yields went down. So that was one piece of evidence. As for the other piece of evidence, we looked back thirty years and ran a regression of how the government's net supply of long-term bonds affects bond yields. We found when the government issues more long-term bonds, bond yields increase. When the government buys back long-term bonds, bond yields go down. QE, really, is like the Treasury buying back long-term bonds and issuing short-term bonds. There's a long history of this, including in non-crisis times. So for both pieces of evidence, when the government buys long-term bonds and issues short-term bills, it can push down the yield curve. 

MK: So QE2 helped with the job growth of the past year? 

JG: It definitely contributed by relieving businesses' fears of a double-dip recession and deflation. This helped with some growth in the economy. But really, not enough. The Fed has not been aggressive enough, it has been too timid.

Can't find the article on inflation expectations at Konczal's blog so will have to look in my archives where I know I linked to it. Did find this nice quote of DeLong's on Jim Grant:

Or take Brad Delong's six minute debate about QE with Jim Grant from last year.  As Delong summarized it (my bold):

I found it depressing because the major unfairness Grant focused on is that, because of the Federal Reserve, investors in money market funds can get only one basis point of interest. The 9% unemployed: they are not the victims. Those who cannot sell their houses because of the foreclosure overhang: they are not the victims. Those whose businesses crash because of slack aggregate demand call they are not the victims. The real victims are the rentiers who have a right to a nice solid well above inflation safe return, and from whom the Federal Reserve is stealing that right.

And I found what I could gauge of Jim Grant's worldview depressing as well. He seemed to be selling rentier-populist ressentiment. Grant's world is full of "takers"--and the Federal Reserve is helping them. And the biggest takers in Jim Grant's mind are the hedge fund operators of Greenwich, Connecticut. Why are they the biggest takers? Because they can borrow cheap, at low interest rates, and put the money they borrow to work making fortunes. If only the Federal Reserve would shrink the money stock and raise interest rates! Then the hedge funds would have to pay healthy interest rates for their cash! Then the profits would flow to the truly worthy: the rentier coupon-clippers now suffering with their one basis point yields.

Never mind what a policy of monetary restraint to "normalize" interest rates would do to the unemployed...

You can read that in the recent statement by Mohamed A. El-Erian of Pimco, who, as Karl Smith noted, wants the Federal Reserve to focus on microeconomic goals instead of the macroeconomic problem of full employment.  This isn't new.  As Keynes noted, "the most stable, and the least easily shifted, element in our contemporary economy has been hitherto, and may prove to be in future, the minimum rate of interest acceptable to the generality of wealth-owners."

The implicit argument is that the interest rate compatible with full employment is too low for financial investors to accept.  Do we then just accept mass unemployment and the subsequent hysteresis-induced slowing of growth and human potential so Jim Grant and Pimco can make a profit they feel is worthy of their financial talents?  Of course not.

Another Bet?

Business Insider article on Noah Smith

Smith continues to hammer on this idea that as a career politician, Abe is really just interested in political issues: 

By making lots of noise about revoking the BOJ's independence, Abe is trying to convince foreigners that inflation is on the way, thus sending the yen south. Basically, he is taking a page out of the LDP's old playbook - weaken the currency, pump up exports. Sure, it's not a sustainable strategy, but Abe doesn't need it to be sustainable; he just needs it to give the economy a fillip for long enough to let him complete his precious revision of the Japanese constitution. After that, he couldn't care less about what happens to the economy. It's a cursory, stopgap measure. To Abe, Japan's pride as a nation is infinitely more important than the fatness of its people's wallets. 

This perspective leads Smith to hypothesize that those hoping for Japan to take center stage as ground zero of the world's next big monetary policy experiment in 2013 will likely be disappointed in a big way. 

Smith writes: 

So what does this mean for monetary policy? It means that Abe is targeting exchange rates, not inflation (or NGDP). He'll do what he has to do to tweak foreign expectations enough to keep the yen weak, but he won't actually follow through and revoke BOJ independence. And even if by some miracle he does revoke BOJ independence, he won't insist on a hard inflation target. A non-independent BOJ wouldn't be controlled by Shinzo Abe, it would be controlled by the Ministry of Finance, and those people are just as likely to fear the peril of hyperinflation. 

Expect Abe to continue making noise at the BOJ, and expect to see some token BOJ response, i.e. a bit more quantitative easing. If the yen starts rising again, expect Abe to switch gears and start talking about (or actually carrying out) currency market intervention of the type carried out in 2004. Essentially, he will continue the current talk of radical monetary policy experimentation precisely as long as he thinks it's holding down the yen, and then abandon it for a different mercantilist stopgap. Do not expect any real action against the BOJ.

Yglesias versus Smith and Kelton verus Woodford.

Floyd Norris at the Times seemed to agree with Yglesias.

Wow, Smith is getting all sarcastic. See the update:

Update: And now today, via the WSJ, I see that I'm completely right about the LDP's economic philosophy. Observe:

Japan's new finance minister upped the ante in the country's war of words against the strong yen, lashing out at the U.S. and Europe for letting their currencies weaken dramatically and calling on the U.S. to strengthen the dollar. 

The tirade from Taro Aso, Prime Minister Shinzo Abe's point person on currency strategy, underscores the increasingly pugnacious stance of the fledgling Abe government... 

"The U.S. ought to do its job and make the dollar strong. And what about the euro?" Mr. Aso said Friday... 

A procession of Japanese executives and politicians have bemoaned the yen's strength, blaming it for a loss of competitiveness, dwindling earnings, bankruptcies and the relocation of operations abroad... 

The dollar has recently staged a sharp recovery, as Mr. Abe's pledge to strong-arm the Bank of Japan into easing monetary policy to weaken the yen has driven investors to sell off the yen. (emphasis mine)

Oh yeah, they're really thinking a lot about inflation rates and money demand and the Zero Lower Bound. Sure.

Yglesias writes "But if he does manage to stick to his guns, the odds are good that it will work. Monetary expansion should reduce the price of the yen and goose exports." So they're in agreement.

Just as with the Evans rule, we'll see how this plays out.

Scott Sumner via Thoma commenter Sadowski:

It would be interesting to know which monetarists Noah is talking about.  (The only “innocent” monetarist Noah links to is Matt Yglesias, who is neither innocent nor a monetarist.)  Like Noah, I’ve been skeptical of the intentions of the Abe government, noting that bond yields don’t show much sign of inflation expectations.  On the other hand the yen has weakened, so there’s likely to be at least a modest change in policy.  But I put faith in markets, not politicians.

As Sumner writes, the thing to keep an eye on are inflation expectations.
----------------
Update:

Smith writes: "Finally, we get to see the ultimate two-men-enter, one-man-leaves doomsday showdown between the immovable object of Japan's implacable deflation and the irresistible force of Print Money And Buy Stuff!"

I don't know the exact story with Japan, but with the U.S. since 2008, low inflation wasn't an "immovable object." I suspect Japan's deflation isn't either. Low inflation was the target for the Fed. When inflation expectation began dipping, the Fed did a QE and they went back up.

I thought this was really well-put by Yglesias:

Japan has been in the economic doldrums since before it was cool. While the United States and Europe waited until 2007 or so to have a real estate crash followed by a prolonged period of slow growth and high unemployment, Japan got in on the act in the 1990s. The country got a brief respite of export-led growth for a couple of years in the aughts under former Prime Minister Junichiro Koizumi, but then was rapidly dragged back down into the muck by the worldwide economic collapse. At this point things have been so bad in Japan for so long that foreign commentators have largely stopped even hoping for a turnaround, just vaguely gesturing at the idea that perhaps a recovery in Europe and America could help Japan out. But at a time when most eyes are on the U.S. fiscal cliff and E.U. negotiations over Greek debt, the real economic game-changer may be Japan’s Dec. 16 election.

That’s because Shinzo Abe, the overwhelming favorite to lead the Liberal Democratic Party to victory, is running on a bold platform of unlimited quantitative easing and more inflation. If this works—and the odds are that it will—Abe will not only cure a great deal of what ails Japan, he’ll light a path forward for the rest of the developed world.

Yglesias does seem to leave out fiscal policy:

But the old monetary theory about what might solve Japanese stagnation has never been put to the test. Now Abe’s finally going to give that old-time advice a try. Japanese politics is murky, and even if he wins the election he may not end up with the political and institutional clout to make it happen. In fact, as Election Day draws nearer, he’s alreadywalking back some of his rhetoric under pressure from the business establishment. But if he does manage to stick to his guns, the odds are good that it will work. Monetary expansion should reduce the price of the yen and goose exports. More importantly, it will push domestic real interest rates down and spur investment. Creating firm expectations that yen-denominated prices will be higher in the future than they are today should encourage firms and households alike to acquire real goods sooner rather than later. And all this ought to encourage everyone to be investing and spending more.

Shinzo Abe, FDR, Nazi Germany, and the Soviet Union

Nationalism and Central Planning

Wikipedia entry on Shinzo Abe

He was the leader of a project team within the LDP that did a survey on "excessive sexual education and gender-free education". Among the items to which this team raised objections were anatomical dolls and other curricular materials "not taking into consideration the age of children", school policies banning traditional boys' and girls' festivals, and mixed-gender physical education. The team sought to provide contrast to the Democratic Party of Japan, which it alleged supported such policies.

...

Since 1997, as the bureau chief of the 'Institute of Junior Assembly Members Who Think About the Outlook of Japan and History Education', Abe led the Japanese Society for History Textbook Reform. On his official homepage[36] he questions the extent to which coercion was applied toward the Comfort Women, dismissing Korean "revisionism" as foreign interference in Japanese domestic affairs. In a Diet session on 6 October 2006, Abe revised his statement regarding comfort women, and said that he accepted the report issued in 1993 by the sitting cabinet secretary, Yōhei Kōno, where the Japanese government officially acknowledged the issue. Later in the session, Abe stated his belief that Class A war criminals are not criminals under Japan's domestic law.[37]

 ...

Abe has visited the controversial Yasukuni Shrine on many occasions. While serving as Chief Cabinet Secretary in the government of Junichiro Koizumi he visited in April 2006, prompting South Korea to describe the trip as "regrettable".[54] He didn't visit while Prime Minister from September 2006 – September 2007, unlike Kouizumi, who had visited yearly while in office. Abe not visiting the shrine prompted a Japanese nationalist named Yoshihiro Tanjo to cut off his own little finger in protest and mail it to the LDP.[55] 

In 2012 Abe visited the shrine on 15 August, the anniversary of the end of the World War II. While campaigning for the presidency of the LDP, Abe said that he regretted not visiting the shrine while Prime Minister.[56] After winning the presidency, he visited it again on 17 October. He said this was in an official capacity as the president of the Liberal Democratic Party.[57]

The LPD was kicked out of power in Japan for the first time in 55 years a few years ago to the more leftwing Democrats Party of Japan. They just returned to power in a landslide with Abe voted in as Prime Minister again.

Abe was the first prime minister born after World War II.

Yglesias is typically liberal in being anti-war and feminist. But like many anti-war liberals he isn't as critical of poorer foreign authoritarian regimes like Russia, China, Iran, Baathist Iraq, etc. as he is of the Imperial Center and his government. Japan is pretty much a first world government, if one subservient to the U.S. Of course, I do believe Yglesias is concerned about high long term unemployment, the welfare state, and, technically speaking, the rising share of productivity gains captured by capital vis-a-vis labor. He goes his own way on privatization, unions, Walmart and public education reform somewhat. Still he is a progressive liberal and doesn't share priorities with rightwingers like Abe.

However, if Abe is successful with his demand management policies, that would be a good thing from Yglesias and my viewpoints.

Yglesias brings up FDR in war time here.

From time to time sheer economic desperation will give us a Junichiro Koizumi or a Franklin Roosevelent but Koizumi didn't last and FDR plunged the country back into recession in 1937 with contractionary policy. Foreign policy crisis is the main thing that drives a national establishment toward heterodoxy and growth. Nobody tried to finance either world war on a sound money basis, and in most respects Keynesian theory followed wartime practice rather than vice versa.

FDR held Indochina (Vietnam) after taking it from the Japanese until the French "could come home" and take it back as their colony.

Yglesias also posted on FDR and the planned economy:

This episode stands out precisely because the US government didn't nationalize much industry during the war, preferring instead to rely on privately owned capital. But it underscores the extent to which over and above anything that happened during the New Deal era, the country spend the years 1939-1945 operating what was for all intents and purposes a planned economy.

Nazi Germany and the Soviet Union were centrally planned totalitarian regimes. What I understood was that the Nazi economy helped bring Germany out of depression. There was the Autobahn and Pynchon's V-2 rockets. The Soviets' "Red Plenty" launched Sputnik* into space as Krushchev said that communism would replace capitalism and "bury it."**

----------------------
* In response to Sputnik, Eisenhower created NASA and the following occurred:

1. Education programs were initiated to foster a new generation of engineers.
2. Dramatically Increased support for scientific research. For 1959, Congress increased the National Science Foundation (NSF) appropriation to $134 million, almost $100 million higher than the year before. By 1968, the NSF budget would stand at nearly $500 million.

**"I once said, 'We will bury you,' and I got into trouble with it. Of course we will not bury you with a shovel. Your own working class will bury you,"[5] a reference to the Marxist saying, "The proletariat is the undertaker of capitalism", based on the concluding statement in Chapter 1 of the Communist Manifesto: "What the bourgeoisie therefore produces, above all, are its own grave-diggers. Its fall and the victory of the proletariat are equally inevitable". Khrushchev repeated this Marxist thesis at a meeting with journalists in the U.S. in September 1959. However, many Americans interpreted the quote as a nuclear threat.[6]

Taylor Rules and NGDP Targets: Skeptical Davids by Thoma

Andy Harless comments

AFAICT David Altig gets it completely wrong. His argument that "nominal GDP targeting...provides a poor nominal anchor in an environment in which there is great uncertainty about the path of potential real GDP" is valid for NGDP growth rate targeting (and indeed is one of several convincing arguments against such a regime). But very few people are currently advocating a regime of NGDP growth rate targeting. The proposals coming from Sumner, Romer, Woodford, etc., etc., are all for NGDP level path targeting, which is a completely different ball game. Compared to the current system, NGDP level path targeting would provide a much more effective nominal anchor. 

In general, level path targeting provides a much more effective nominal anchor than growth rate targeting -- which is essentially what we have now, a system that targets the growth rate of the price level, otherwise known as the inflation rate. If one insists on using a growth rate target, there are any number of strong reasons to prefer the current system over an NGDP growth rate target. But once you accept using a level path target, those objections disappear, and I think there is a very strong case for preferring an NGDP level path target over a price level path target. I also think that, on balance, the credibility gained by using a level path target rather than a growth rate target is worth the cost in terms of occasional instability (when you have to overshoot deliberately in one direction to make up for an earlier undershoot, etc.). I didn't think that before 2008, but at this point I'm convinced.

Japandroids and Shinzo Abe Lincoln

Trust not in Shinzo Abe, ye monetarists! by Noah Smith

The Biggest Economic Policy Story In The World Is Happening In Japan by Yglesias (12.26.12)

Scanning Google News I note that most of the western press is focusing on Abe's hawkish foreign policy views rather than his dovish monetary ones. To get a bit speculative, I think there may be a conncection here. Observationally, it seems that fat and happy political establishments have an irrational preference for slow growth, tight money, and balanced budgets. From time to time sheer economic desperation will give us a Junichiro Koizumi or a Franklin Roosevelent but Koizumi didn't last and FDR plunged the country back into recession in 1937 with contractionary policy. Foreign policy crisis is the main thing that drives a national establishment toward heterodoxy and growth. Nobody tried to finance either world war on a sound money basis, and in most respects Keynesian theory followed wartime practice rather than vice versa. And during the Cold War it was very important to elites in the United States and Western Europe to not merely establish that market capitalism could push the production possibility frontier outwards, but that it would actually deliver sustained improvements in living standards and an approximation of full employment. 

A perception that between a fast-growing China and a possibly-retrenching USA, Japan is facing a growing national security crisis is exactly the kind of thing that can rouse a country from its dogmatic slumbers.

Smith says it's not just his foreign policy that is "conservative" or rightwing.

Krugman on Capital Controls and Mahathir Mohamad.

Malaysian Prime Minister Mahathir Mohamad has been the wild man of the Asian crisis, blaming all his problems on manipulations by Jewish speculators, denouncing the prescriptions of the International Monetary Fund as part of a Western conspiracy to recolonize Asia, and so on.

Krugman's blogpost about the IMF and capital controls.

In Japan, a Test of Inflation Targets by Floyd Norris

Missing The Big Japan Story by Tim Duy

LDP Wins Landslide in Japan by Yglesias

Can Shinzo Abe Save Japan? The candidate with a plan to cure what ails rich economies. by Yglesias (11.30.12)

Currency Wars Aren't Zero Sum by Ygleisas

Yglesias links to a Japan Times piece:

Shinzo Abe said he would consider making the Bank of Japan purchase construction bonds directly from the government to tame chronic deflation if his Liberal Democratic Party wins December's Lower House election and he becomes prime minister. 

Abe, who heads the largest opposition party, also said he would appoint as the central bank's next governor someone who agrees with his proposed annual inflation target of 2 to 3 percent. BOJ Gov. Masaaki Shirakawa's term of office is set to expire next April. 

"We would carry out necessary public investment and have the BOJ purchase construction bonds to forcibly put money in the market," Abe said Saturday in the city of Kumamoto, referring to special government-issued bonds to raise funds for public works. "We would take fiscal policy steps as well as monetary policy measures to overcome deflation at an early time."
The remarks by Abe, a former prime minister, are backed by many LDP members who have called for massive public works spending to stimulate the economy, but are considered controversial by other parties given Japan's precarious fiscal state and snowballing government debt. 

Under current law, the government is obligated to cover fiscal spending with tax income but it is also allowed to issue special construction bonds for public works, for instance to fund new roads and bridges, as politicians claim such infrastructure will be used for years and insist future generations should have to bear the financial burden. 

Forcing the BOJ to buy government bonds has been long considered taboo because the move caused hyperinflation and devastated Japan's economy immediately after the end of World War II. 

The fiscal law prohibits the central bank from underwriting government-issued bonds. Any purchases of construction bonds by the BOJ could be considered tantamount to the bank financing fiscal deficits, and could thus cause interest rates to spike.

Ben Bernanke's Secret Message to Congress: More Stimulus, Please: by Matt O'Brien

It's right out of Ben Bernanke's playbook. As Tim Duy, a professor at the University of Oregon, points out, Bernanke's often cited "helicopter drop" speech about how to stop deflation -- the idea was you could drop money from the sky as a last resort -- did not say a central bank could do this on its own. Bernanke said a "determined government" could "always generate higher spending and hence positive inflation," emphasis on the word government. Bernanke wants Congress to help him, and he's doing everything he can to let them know.

Great piece except that last line.

Deficit caused by post-bubble slump

This is what Dean Baker has been arguing.

On the Economics and Politics of Deficits by Krugman

He links to Evan Soltas and Joe Weisenthal.

But They Will Always Smash It On The Floor by Duncan Black

But Republicans will inevitably see a balanced budget as an opportunity to give money to rich people (tax cuts and crony capitalism). The reward for liberals for this well done very important work? Tax cuts for rich people and unpaid for disastrous wars. 

Liberals should spend their time in office figuring out how to implement a sticky liberal agenda, one which is hard to dislodge, not figuring out how to create a pot of money for Republicans to steal when it is their turn.

(via DeLong)

My comment in response to "bakho:"

Excellent point about the cut to the capital gains tax rate. The primary cause of the deficit is the post-housing bubble slump. The real arsonists are the ones who paved the way for the bubble. The real deficit "hawks" are those pushing more pro-growth stimulus like short-term government spending and expansionary monetary policy.

 See Shinzo Abe Lincoln and his demand management policies. (Pro-growth stimulus is sort of redundant. I guess tax cuts are't pro-growth stimulus???)

Policy Implications of Capital-Biased Technology: Opening Remarks by Krugman

Actually, something like that is already happening, although it’s mostly coming from rising inequality of earned income. Remember, back in the 1980s the Greenspan Commission supposedly fixed Social Security’s finances for 75 years, that is, until 2060. Why, then, do most projections show the trust fund running out well before then? Not because life expectancy is rising — that was already built into the projections. No, the big reason is rising inequality, which has led to a growing share of income coming above the payroll tax cap, so that SS revenue lags behind overall compensation. And yet the conventional wisdom is that we should respond to a financing issue caused by rising inequality by slashing benefits, further increasing inequality. 

We should keep this line of argument in mind — and when somebody talks about the need to rein in entitlements, we should always ask whose interests, exactly, are being served.

And the Fed has consistently fallen short in its predictions of economic growth and the strength of the recovery.

Currency Wars Aren't Zero Sum by Yglesias

Very interesting column by Floyd Norris:

Reading Pessimism in the Market for Bonds

Michael Gavin, the head of United States asset allocation for Barclays, pointed out this month that over the past 30 years an investor who stayed invested in American, or British, 10-year government bonds would have earned more than 5 percent a year over inflation. 

“It does not require advanced market math to understand that returns like these are no longer remotely plausible,” he wrote. “But they say that fish don’t know that they live in water — until they are removed from it — and we wonder if some of the many market participants whose entire professional experience has been conditioned by the financial backdrop created by the bond market rally might underestimate some consequences of its termination.” 

Even if rates stay where they are for the next five years, and investors collect the interest coupons, he said, “bonds will be transformed from wealth creators into wealth destroyers.” 

Or at least they will be unless there is severe deflation. For that is the only situation that will allow today’s new long-term bonds to turn into good investments. 

Is that possible? To think it is likely, you pretty much have to assume that economic growth is a thing of the past in both the United States and Europe. It is not an optimistic outlook. 

James Grant, the editor of Grant’s Interest Rate Observer — and a bear on bonds for some time — argues there are parallels between 1981 and now, at least in conventional wisdom. 

“Central banks are harmless, said the bond bears in 1981; in a social democracy, inflation is ineradicable,” he writes in the current issue of his publication. “Central bankers are harmless, charge the bond bulls of 2012; in an overleveraged economy, inflation is unachievable.” 

One reason bond yields are so low now — at least in markets like Britain and the United States — is the fact that after the Greek fiasco investors have come to fear default more than currency depreciation. That had led to a rush to default-proof bonds, which means bonds issued by countries that can print the currency they borrowed. (It may be that Treasuries will not always be default-proof because a Tea Party-influenced Congress will refuse to allow the government to pay its bills. But so far markets assume the politicians will not be that stupid.) 

It is interesting to look at the relationship of stocks and bonds when the bond market is near extremes in valuation. Those moments tend to come when economic uncertainty is high and fears are widespread. In the past, such fears have proved to be wrong. 

In 1946, there was a consensus among many economists that a new depression was likely. After all, the 1930s depression did not end until armies put unemployed people to work. Now that the war was over and armies were shrinking, would not the economy retreat again? 

Bond prices turned down — and yields up — in the spring of 1946. Stocks sold off that fall, and it was not until 1950 that the stock market got back to where it was when the bond bear market began.

The Signal and the Puppet Theater

Mr. Universe:  Oh, this is good. 
                          You guys always bring me the very best violence.
                          You think you're in a hot place?

Mal:                  That's what we're looking to learn. Is there any follow up, a newswave?

Mr. Universe:  There is no news. There's the truth of the signal.
                          What I see. And, there's the puppet theater...
                          the Parliament jesters foist on the somnambulant public. 

Mal:                  Well, what about this? Did this make the puppet theater? 

Mr. Universe:   No, sir. And no lawforce flags, either.
                           I had to go into the security feed direct. 

Mal:                  You can do that?

Mr. Universe:   Can't stop the signal, Mal.
                           Everything goes somewhere, and I go everywhere.

The Closing of the Conservative Mind

(or the Nervous Breakdown of the GOP )

Yesterday I wrote about the good shows of 2012.

One I failed to mention was "The Colbert Report" which along with "The Daily Show" had a good year. American Conservatives provided them with ample material.

Just off the top of my head, there was the Republican primary where primary voters went from candidate to candidate (Perry then Gingrich then Cain then Bachmann then Trump(!) (probably not the right order)) trying to find an alternative to Romney. This had the effect of driving Romney to the right.

There was the CATO putsch.  DeLong had a good title: "THE FIGHT OVER THE CATO INSTITUTE: JUDEAN PEOPLE'S LIBERATION FRONT/PEOPLE'S LIBERATION FRONT OF JUDEA BLOGGING"

The attacks on Bernanke by Rick Perry, Romney, etc.

Matt O'Brien coined  "The Age of Niallism" in reference to Nial Ferguson, his Newsweek cover story on Obama, and the "post-fact world."

Republican Senate candidate Akin's medival views on "legitimate rape."

Romney telling his rich crank donor base what they want to hear about the 47 percent in the tank for Obama.

The rhetorical assault on Nate Silver. ("He has no special sauce." No, but his projections were right again.) The assault on the Bureau of Labor Statistics by Jack Welch among others.

And finally, the way the Romney campaign was caught by surprise on election night. There is no engagement with facts coming from the other side. Karl Rove among others was sure they won.

Michael Barone rationalized their error with the classic (see above on the masthead) nonsensical explanation "What happened? I think fundamentals were trumped by mechanics and, to a lesser extent, by demographics."

I think what he was trying to say is that Democrats were able to turn out the growing numbers of blacks and latinos and they overcame the fundamental conservatism of America. But demographics and the mechanics (of the electoral college for example) are fundamental to elections.

Some reality broke through via Megyn Kelly who contradicted Rove in real time on Fox News and Chief Justice Roberts breaking ranks with his conservative colleagues on Obamacare.

Although Roberts opined that past court opinions on the Commerce Clause were probably wrong, thereby invalidating the New Deal.

So it could have been worse had Kelly, Fox News and Roberts not chosen to bend instead of breaking. Still, are we witnessing the popping of the conservative political bubble?

Leverage Goes Out on a High by June Thomas

Five seasons is a good run. I was surprised by the ending of the show and series in the finale the other night. And I was bummed out! (I had a bubble with "WTF?!?!" over my head as the last show ended and Nate proposed to Sophie, then Parker took over the remaining crew of three.) Shows how lame and old I'm getting. It also demonstrates how good basic cable shows can be and how the good ones can challenge you and make you think. What I really liked about "Leverage" was the combination of actors and the characters the show created for these actors. They were fun and clever.

We're getting spoiled with shows like "The Wire," True Blood" and "Game of Thrones" and then basic cable with "The Shield," "Battlestar Galactica," "Justified," and "The Walking Dead" among others.

The best TV series of 2012: The ballots (Onion writers make their picks) The overall results:

The Best TV of 2012 

To vote, 30 of our writers allocated 200 points among 15 to 20 shows, with no writer allowed to give more than 15 points to any one show. (You can see those ballots here.) What resulted was a mix of familiar faces, brand-new shows, and long-running favorites that finally cracked our list of TV’s best.

Never got into the top 2, "Mad Men" and "Breaking Bad." Nor "Girls." I did watch "The Walking Dead," "Justified," "New Girl," "30 Rock," "Game of Thrones," "Parks and Recreation," "Homeland," and "Louie." I'm sort of a Sci-Fi dork so I loved "Alphas" and "Lost Girl." Good escapism!

(Update: I forgot "Always Sunny In Philadelphia" and "Spartacus.")

As Swing Districts Dwindle, Can a Divided House Stand? by Nate Silver

...There have been other periods in American history when polarization was high — particularly, from about 1880 through 1920. But it is not clear that there have been other periods when individual members of the House had so little to deter them from highly partisan behavior. 

In the partisan era between 1880 and 1920, there were extremely rapid shifts in the composition of the House. For example, Democrats went from controlling 72 percent of House seats in 1890 to 26 percent in 1894. That is equivalent to Democrats losing about 200 seats in the House relative to today’s baseline of 435 Congressional districts. 

...

Certainly, Republicans can’t be entirely happy with their predicament. The Electoral College now seems to disadvantage them at least slightly, and if they struggle in the 2014 and 2016 elections, a better case can be made that the party is underachieving. 

But because of the way districts are configured, their position in the House should be quite robust: it would require a Democratic wave year, and not a merely decent election for Democrats, as in 2012, for Republicans to lose control of the House. 

These strengths and weaknesses for the Republican Party could be self-reinforcing, or at least they may have the same root cause. The district boundaries that give Republicans such strength in the House may also impede the party’s ability to compromise, reducing their ability to appeal to the broader-based coalitions of voters so as to maximize their chances of winning Senate and presidential races. If so, however, that could mean divided government more often than not in the years ahead, with Republicans usually controlling the House while Democrats usually hold the Senate, the presidency, or both. As partisanship continues to increase, a divided government may increasingly mean a dysfunctional one.

Capital Biased Technological Progress; It Doesn't Just Happen by Dean Baker

The Biggest Economic Policy Story In The World Is Happening In Japan by Yglesias

The Deficit Was Not Ballooning Until the Economy Collapsed by Dean Baker

Actually the deficits were not ballooning until the collapse of the housing bubble crashed the economy in 2008. The budget deficit in 2007 was 1.2 percent of GDP and the debt to GDP ratio was falling. The Congressional Budget Office projected that it would stay in this neighborhood for another decade or so even if the Bush tax cuts did not expire. The reason that the deficit became large and the debt to GDP ratio started to rise was that the collapse of the economy cost the government hundreds of billion in tax revenue annually and led to hundreds of billions of additional expenditures for unemployment benefits and other programs to counteract the impact of the downturn.  

While the Bush tax cuts may have been bad policy, in fact they were affordable in the context of an economy that was near full employment. If the collapse of the housing bubble had not sank the economy, there would be little issue about the sustainability of the debt.

The Fed and Interest Rates by Krugman

The "Maestro"

Mr. Incompetent, the Economy Wrecker Alan Greenspan, Was Central to the Formation of the Campaign to Fix the Debt by Dean Baker

Baker makes the point that the Bush-era deficits weren't that bad until the housing bubble popped.

Bond Vigilantes and the Power of Three by Krugman

Giving Mom’s Book Five Stars? Amazon May Cull Your Review

The Three Wolf Moon T-shirt meme

KONY 2012 & YOLO (you only live once)

Weird teen and tween memes of 2012

And coincidently YOLO is just a twist on the Old Valyrian valar morghulis, "all men must die."

Then there's Keynes "In the long run we're all dead."

From this past year Part Two

Cold Winds Are Rising (April 2, 2012)

Also during the small council meeting, Maester Pycelle displayed the white raven from the Citadel in Oldtown which means the maesters had determined the long summer was over and Winter is Coming. Littlefinger noted they had enough wheat for 5 years but if the winter lasted longer, well they'd have fewer peasants, of course.

For some reason this reminded me of macroeconomic policy discussion. In the United States, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is generally seen as the authority for dating US recessions just as the conclave of maesters date the seasons in Westeros. And it reminded me of the way elite policymakers take an "objective" view of the fates of the "small people." Fewer peasants if they didn't store enough wheat? No biggie. Transforming cyclical unemployment into long-term unemployment and degrading the nation's productive capacity with a prolonged output gap? Oh well, won't really effect our social circle, just the common people, who as Jorah Mormont said "don't care about the games the high lords play" and only "pray for rain, health and a summer that never ends."

Alas poor Yoren! I knew him well. (April 16, 2012)
(or the dragons are gone....) 

Spoilers!

"What's Dead May Never Die" Onion recap (for experts)

Good comments.

"What's Dead May Never Die" Onion recap (for newbies) 

More good comments.

The commenter "Archmage of the Aether" made me laugh with his avatar and comments:

Me: "Game of Thrones: the greatest show that ever was or will be!"

Fantasy, Modernism, and Capitalism (April 24, 2012)

What's attractive about the fantasy genre for me is that modernism entails capitalism and the cash nexus. The cash nexus dissolves bonds of social solidarity and value until you are left with nothing but price and cost. After the Cold War, welfare capitalism has given way to "greed is good" capitalism.  There is no (or not much) honor, chivalry, loyalty, integrity, or virtue which were once the the redeeming aspects of capitalism's predecessor Feudalism. (Although obviously not everyone was honorable back especially given material circumstances.) Also late capitalism entails consumerism, and wall-to-wall advertising (flashing billboards, telemarketers calling during dinner, spam and pop-up ads), environmental disaster, urban blight, and an economy dominated by the financial sector and speculation/gambling. The Fantasy genre is a respite from all of that. Perhaps it's escapist to harken back to a lost age, but the fantasy genre does hold up the good virtues even if like in Game of Thrones, it's a brutal time of war.

Capitalism is undeniably a giant progress in a number of areas. Feminism and notions of human rights arrived in late-capitalism and welfare capitalism had less of a stratified, class structure. One of the undeniable reactionary aspects of Feudalism is its authoritarian appeal to a rigid social structure where everyone knows their place. Also obviously capitalism has less starvation during winter. Westeros is chock full of prostitution and the suffering small people. Esteros is full of slaves and brutality. What is compelling about Game of Thrones is that it explores the dark side of Feudalism in a realistic manner and doesn't romanticize it.

Why Two Percent Inflation Targeting is the New Gold Standard by Yglesias (May 22, 2012)

Season 2 Game of Thrones finale (June 4, 2012)

"Valar Morghulis" Onion review (for newbies)

"Valar Morghulis" Onion review (for experts)

Election Forecast: Obama Begins With Tenuous Advantage by Nate Silver (June 10, 2012)

It's the Fed's Time to Step Up by Christina Romer (June 10, 2012)

Instead, the policy-making committee could adopt the proposal of Charles Evans, the president of the Federal Reserve Bank of Chicago, that the Fed pledge to keep rates near zero until unemployment is down to 7 percent or inflation has risen to 3 percent. Such conditional guidance assures people that the Fed will keep at the job until unemployment is down or the toll on inflation becomes unacceptable. 

True Blood starts the new season off with a bang. Banging siblings, that is (io9 recap) by Meredith Woerner(!) (June, 11, 2012)

Pam! Pam! Pam! (or "One what?" as in Sookie will "owe one," a favor, to Pam.) (June 11,2012)

Lost Girl (June 12, 2012)

True Blood’s got 99 plot lines, and now Rick Santorum’s one? by Meredith Woerner (June 20, 2012)

Haters Gonna Hate (June 22, 2012)

Stabilizing prices is immoral by Steve Randy Waldman (June 24, 2012)

Supreme Court rules on Obamacare (June 29, 2012)

In this season's True Blood, the backdrop is a conflict between the vampire Authority and the vampire Sanguinista movement. The Authority desires co-existence with humans via its strategy of "mainstreaming" as a matter of survival since vampires are outnumbered. The Sanguinistas believe in the literal interpretation of the vampire bible which says that humans are no more than food and to treat them as other than such is blasphemy.

Chief Judge John Roberts just acted like Christopher Meloni's Roman, the lead "Guardian" of the Authority. Roberts saw that if the conservative judges continued to act like super Senators with super vetoes - see Bush v. Gore and Citizens United - it would provoke a backlash. It would turn the U.S. into a banana republic instantly (rather than the slow erosion of Citizens United.) Likewise, Roman concludes that the Sanguinistas have not learned the historical lesson that it would be suicidal for the vastly outnumbered vampire population to start a war with humanity.

Why Is Ben Bernanke The Only Man in Washington Who Care About Jobs? by Timothy Noah

central banker vigilantes

BACK WHEN I FEARED THE BOND-MARKET VIGILANTES: MAUNDERING OLD-TIMER REMINISCENCE WEBLOGGING by DeLong

The right policy, we thought--and I think the evidence is pretty clear that we were 100% right--was to aggressively move to reduce the budget deficit in 1993 even thought the recovery was weak in order to eliminate any market expectations that high deficits would lead to higher inflation, and--more importantly--to eliminate any belief on the part of the Federal Reserve that it need to raise rates rapidly and far [sic?] to create a low-investment jobless recovery in order to guard against any possibility of a renewed inflationary spiral. 

That was not an attack but a horizon-sighting of bond-market vigilantes--or perhaps only the market thinking the Federal Reserve thought it was about to get a horizon-sighting of bond market vigilantes.

This is the famous episode where Clinton throws a tantrum over being pressured by Rubin and Greenspan to drop his campaign promise of enacting a middle class tax cut-spending bill  and where Carville says he now wishes to come back as the bond market. Here is where the social democratic, Eisenhower-Republican elite political class bend the knee to the giant vampire squid financial sector. Clinton should have pulled a Shinzo Abe and replaced Greenspan.

DeLong  writes "I think the evidence is pretty clear that we were 100% right." What's the evidence? A recent meme and topic of discussion has been the declining labor share of productivity gains. Ever since the 1980s we've a had a shampoo economy: bubble, bust, rinse, repeat. The 1990s look better in light of the 2000s, but they ended with a stock-tech bubble which morphed into a disastrous housing bubble. 

Every recovery from a recent recession have been a slow "jobless recovery."

...and--more importantly--to eliminate any belief on the part of the Federal Reserve that it need to raise rates rapidly and far [sic?] to create a low-investment jobless recovery in order to guard against any possibility of a renewed inflationary spiral. 

George W. Bush increased deficits and failed to renew an inflationary spiral.