"It is easy to confuse what is with what ought to be, especially when what is has worked out in your favor."
- Tyrion Lannister
"Lannister. Baratheon. Stark. Tyrell. They're all just spokes on a wheel. This one's on top, then that's ones on top and on and on it spins, crushing those on the ground. I'm not going to stop the wheel. I'm going to break the wheel."
- Daenerys Targaryen
"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
"If you want to know what God thinks of money, just look at the people he gave it to."
- Dorothy Parker
Saturday, February 18, 2012
Our English stupidity is a point of pride for us. P.G. Wodehouse, whose spirit haunts the corridors of Downton, had the fundamental comic insight, when he made the manservant Jeeves well-read, cultivated, and sly, and his master Bertie Wooster genial, candid, and dim. So that, when Bertie occasionally rises to an apt Shakespearean adage—“And thus the native hue of resolution is sicklied o’er with the pale cast of thought”—he will always add the modest disclaimer: “Not mine—Jeeves’s.” The clever servant had been a stock figure in comedy way back in antiquity, but the master had never been so completely the servant’s creation as Bertie Wooster was.
Mr. Carson, the butler at Downton (Jim Carter), has a Jeevesian conservatism and sense of the decorums of country house life. Unfortunately, he is not blessed with the Jeevesian gift of total success at thwarting all comers. His master, the Earl of Grantham (Hugh Bonneville), commits the fundamental error of choosing his former batman from the Boer War, John Bates (Brendan Coyle), as his valet. In doing so, he has allowed his heart to influence his head. Bates has a limp and is therefore—as the rivalrous servants almost unanimously believe—unsuitable for the job.
This business, by the way, of officers giving employment to their batmen, their personal military servants, in later civilian life—this is or was a well-known cover for homosexual attachments. One went into the army and formed a passionate liaison with a man from another class. The war over, one brought the batman home, under pretext of valeting requirements. And while we have as yet (at the end of the second season, with a third already promised) no proof of any impropriety in the relationship between Bates and the earl—no eve-of-battle indiscretion on the veldt, no cuddles on the High Karoo—nonetheless we ought to treat with suspicion the bare story that, in some unspecified way, Bates saved the earl’s life in what was referred to as the African War.
- reclaim productivity from rent-seekers like the textbook cartel (via means like the new Apple Author app, etc.)
- follow Germany's lead on worksharing. It probably helped with their budget deficit and helped to counteract the European Central Bank's tight monetary policy
- Bank of Japan is targeting one percent inflation. The Fed recently stated that it is targeting two. Why not target higher inflation rates briefly or target trend line NGDP growth? According to rational criteria, Bernanke is wrong and current Fed policies are not working.
- massive fiscal spending while Republicans control the House of Representatives
- creation of workers paradise where people have lots of leisure time.
Employing the banking sector as the main way to add AD allows the financial sector to fight back politically against regulation and taxation. This would help when interest rates are at the zero bound.
Kenyan Socialism would look at ways to head off asset bubbles rather than just by raising interest rates during times of deflationary pressures.
Kenyan Socialism would look at ways to deal with global imbalances with Germany and China.
The financial crisis of 2008 didn't start with Lehman but rather started with the implosion of the subprime mortgage market. It was a mistake for regulators like Bernanke to think of it as contained. The bailed out Bear Stearns but let Lehman go unaware that there would be a bank run in the repo market.
Hopefully the Troika (European Commission, European Central Bank, and the International Monetary Fund) realizes that a disorderly Greek exit from the Euro could cause a panic.
What we learned from the Temin and Wigmore paper is that one way out of a recession at the zero lower bound is by changing expectations. To do that, often what is needed is a very strong change in policy – something economists call a “regime shift”. The most effective way to shake an economy out of a terrible downturn when we’re at the zero lower bound is an aggressive change in policy that makes people wake up, say “this is a new day” and change their expectations. What the Fed has done since early 2009 is much more of an incremental change.
I think that what the Fed needs instead is a regime shift. A number of economists have suggested that the Fed adopt a new framework for monetary policy, like targeting a path for nominal GDP. If the Fed adopted such a nominal GDP target, they would start in some normal year before the crisis and say nominal GDP should have grown at a steady rate since then. Compared with that baseline, nominal GDP is dramatically lower today. Pledging to get back to the pre-crisis path for nominal GDP would commit the Fed to much more aggressive policy – perhaps more quantitative easing and deliberate actions to talk down the dollar. Such a strong change in the policy framework could have a dramatic effect on expectations, and hence on the behavior of consumers and businesses.(via Thoma)
Economic Reports Show a Brightening Outlook
E-Commerce Sales Up 5.8 Percent, Best Quarter In Five Years by Yglesias
Friday, February 17, 2012
It looks like QE2 was a reflection of deflation expectation going up in the Spring of 2010 and that it succeed as deflation expectations came back down. This isn't airtight proof but it's suggestive. Good catch by Konczal about something of which I wasn't aware.
CBO Says Weak Demand Is Causing High Unemployment by Yglesias
Doug Elmendorf, on the CBOBlog: "Slack demand for goods and services (that is, slack aggregate demand) is the primary reason for the persistently high levels of unemployment and long-term unemployment observed today, in CBO’s judgment."
Playboy (!) interview with KrugmanThis is correct. Strangely the subsequent discussion completely neglects monetary policy as relevant to demand. The Federal Reserve is supposed to conduct monetary policy independently, but that doesn't mean that other arms of government are supposed to pretend it's not there.
In Ryan Lizza's article about Obama's mishandling of the economy - by listening to the advice of Orszag, Emanuel, Plouffe, Geithner/Bernanke, the VSPs - he linked to Summers famous 2008 memo. The memo says somewhere - but I can't find it - that the most effective part of the Bush 2003 stimulus package was aid to the states.
The German labor system, with its incentives to move workers to part time rather than lay them off, does appear to have been critical in keeping the country’s unemployment rate from rising more than it did during the credit crisis.
But the decline of unemployment since then has more to do with the fact that Germany — perhaps unintentionally but certainly effectively — has managed to assure that its currency is undervalued, both relative to that of its neighbors and to much of the rest of the world. That has helped the country’s exporters and brought more business to the country.The impact of currencies could be seen earlier this month on successive days when Nissan, the Japanese automaker, and Daimler, the German maker of Mercedes cars, announced profits. Nissan moaned about the yen, which makes it very difficult to make money exporting cars from Japan, while Daimler forecast strong earnings if the euro stays where it is. The euro has lost a third of its value against the yen since the credit crisis began.
The O.E.C.D. report is worth reading for its explanation of labor policies that other countries should consider. In good times, many German workers work overtime but are not immediately paid for it. Those hours are credited to their account, and when times get rough they go on part time but are paid full-time wages, with the difference coming out of the account. Another government policy allows companies to reduce hours with the government making up two-thirds of the lost pay.
Those policies no doubt reduce hiring when times are good, but also hold down layoffs when times are bad.
Not all is rosy in the German labor market. Felix Hüfner, an O.E.C.D. senior economist in charge of the German desk, told me that he was worried about the fact that about two-thirds of younger German workers did not have permanent jobs. Instead, they have “fixed-term contracts,” which make it easier for companies to let them go when the contracts end. Germany may, he said, be in danger of becoming a “two-class society,” with most older workers in a protected group and most younger ones outside of it.
Thursday, February 16, 2012
Thoughts on Potential Output, Monetary Policy, and Economic Weblogging: A Comment on Scott Sumner's Comment on Bullard and Duy by DeLong
It's like when Christina Romer wrote an editorial in support of NGDP level targeting or when NYTimes journalist Binyamin Appelbaum asked Bernanke at a press conference if the Fed was considering it.
Ezra Klein's WonkBlog has an interesting piece asking whether Greece is going to have the dubious honor of having the largest economic downturn in modern history. The piece quotes Uri Dadush, a former World Bank official, who predicts a decline of 25-30 percent, which would beat both Argentina's 20 percent decline in 1998 to 2002 and Latvia's 24 percent decline in the current crisis.
The piece is a bit sloppy on one point, saying that Argentina's decline followed the default on its debt in December of 2001. Actually, the vast majority of the decline preceded the default. Argentina's economy had already contracted by more than 16 percent by the time of the default. It shrank by around 5 percent following the default before turning around in the second half of 2002.
Source: International Monetary Fund.
This matters in the current context since many people are asking what alternatives Greece has to following the austerity path being demanded by the IMF, the ECB, and the EU. While there are reasons that a default would be more difficult in Greece's case than Argentina's (most importantly Argentina had its own currency), the post-default experience of Argentina suggests that it probably chose the better route.
Wednesday, February 15, 2012
Big News: Japan Targets Higher Inflation by Dean Baker
Japan's central bank took the extraordinary move of targeting a higher rate of inflation, setting a 1.0 percent inflation target. This should have been front page news.
The idea of a central bank setting an inflation target above its current level, in the hope of raising inflationary expectations, dates back to a paper by Paul Krugman in the late 90s. (Federal Reserve Board Chairman Ben Bernanke endorsed the same policy when he was still a professor at Princeton.) The logic is that if the central bank can credibly commit itself to a higher inflation target then the commitment could create self-fulfilling expectations. Businesses would invest and consumers would spend based on the expectation of higher inflation, which would mean a lower real interest rate. The increased business activity would then lead the inflation targeted by the bank.
This decision by the Japanese central bank will provide an opportunity to test whether such targeting can work. If it proves successful, it may lead to more pressure on other central banks (like the Fed) to go this route.Again with Potential Output by Tim Duy
In Bullard's model, the housing bubble popped, and millions of people who were employed are no longer employed, nor should we expect them to be employed (or to reenter the labor force) as there is no way to do so absent another bubble. This seems to me an obvious place for fiscal policy and monetary policy to step into the breach and compensate for the lost demand. That millions of people's labor and output be lost simply because they no longer believe that housing prices don't always rise is a gross waste of resources.
You can tell a story in which that bubble-driven demand was necessary to compensate for negative equilibrium interest rates for risk free assets (driven by excessive saving by Asian central banks and aging demographics in the developed world). Rather than wait for another asset bubble to come along and lift demand, or twiddle your thumbs hoping another recession doesn't hit while you are at the zero bound, you could pull out the old-Bernanke playbook and implement an even more aggressive mix of fiscal and monetary policy to compensate for the lost demand and flood the world with risk free assets.Mind the Gap by Menzie Chin
Bullard On Duy On Bullard On Potential Output by Barkley Rosser
Duy on Bullard on Duy on Bullard on Tinker to Evers to Chance by Krugman
It seems to me that Bullard has shifted his position. In the first version, which I discussed here, Bullard seemed to be arguing that the wealth loss from the burst bubble represented a real destruction of economic capacity. Now he seems to be making a quite different case: that the economy in 2005-2007 was operating at an unsustainably high rate of capacity utilization, driven by the bubble.Link from yesterday, Ben Bernanke and the Zero Bound by Laurence Ball
I don’t buy this version either.
One reason not to buy it is the reason Duy cites: if the economy was so overheated in the mid-naughties, where was the inflation? Where were the labor shortages?
But there’s another reason I don’t believe it: demand in the mid-naughties was not, in fact, at fever pitch.
Yes, we had very residential construction and high consumer spending. But we also had record-high trade deficits, so that overall demand wasn’t that vigorous, after all....
In his Tokyo speech in May 2003, Bernanke was still urging aggressive policies at the zero bound. By July 2003, as we will see, he was ignoring most of his previous ideas and proposing more cautious policies. What explains this sudden change? The obvious answer, at one level, is that Bernanke was influenced by the FOMC meeting of June 24.When they deign to discuss the bubble and financial crisis, conservatives point to Fannie and Freddie or point to Greenspan keeping rates too low too long. Well in 2003 they are facing deflation! Bernanke seems concerned about avoiding deflation rather than maintaing full employment.
At the time of this meeting, Japan had been stuck at the zero bound for four years, and the United States was experiencing its deflation scare. In that setting, the meeting began with abriefing by Vincent Reinhart, Director of the Board’s Division of Monetary Affairs, called “Conducting Monetary Policy at Very Low Short-Term Interest Rates.” Reinhart outlined possible policies to “provide impetus to the economy” if the federal funds rate reached zero. After Reinhart spoke, Dino Kos, head of the trading desk at the New York Fed, described some details of implementing Reinhart’s ideas. A week earlier, FOMC members had received outlines of the Reinhart and Kos briefings in bullet-point form. [emphasis added.]
I can find only one occasion between 2004 and 2009 when Bernanke discussed policies at the zero bound. His comments were a response to a written question from Senator Bunning of Kentucky during Bernanke’s 2005 confirmation hearings. Bunning was the only Senator to vote against Bernanke’s first confirmation as Fed Chair. Bunning’s question is motivated by Bernanke’s reference to “helicopter drops” in his 2002 speech on deflation. Bunning notes that Bernanke has earned the nickname “helicopter Ben” and asks, “Would you like to elaborate on your comments on deflation?” In answering, Bernanke recalls the 2002 speech:
Bunning was one of the dumbest Senators around. Mitch McConnell hated him.I noted that one possible tool for combating deflation, a money-financed tax cut, was essentially equivalent to a theoretical construct used by Professor Milton Friedman, a “helicopter drop” of money. Of course, the “helicopter drop” metaphor is purely a pedagogical device to help explain money’s role in the economy, not a practical policy tool. A key message of my speech was that, contrary to some views that were being expressed at the time, the central bank still has the tools to address deflation even if the short-term interest rate reaches zero.
Tuesday, February 14, 2012
Whit Stillman’s First Movie in 14 Years Looks Pleasantly Familiar by David Haglund
Monday, February 13, 2012
Three Views of the State of the Economy by Stephen Williamson
The neoclassical growth model,
also known as the Solow–Swan growth model or exogenous growth model, is a class of economic models of long-run economic growth set within the framework of neoclassical economics. Neoclassical growth models attempt to explain long run economic growth by looking at productivity, capital accumulation, population growth and technological progress.As Duy writes, "The backbone of the CBO's estimates is a Solow Growth model".
Sunday, February 12, 2012
Even Critics of Safety Net Increasingly Depend on It by Binyamin Appelbaum and Robert Gebeloff
Bubbles and Economic Potential by Krugman
Asset Prices and Potential Output by DeLong
The Daily Douchehat:
Can the Working Class Be Saved? by Ross Douthat