Cotton-Eye Joe

Wherein I Try to Help Robert Waldmann Calm Down by David Glasner

(via Thoma)

The Problem of Collapsed Asset Bubbles

Steven Pearlstein Tries to Rescue His Austerity Pushing Friends by Dean Baker

These countries are suffering today from the fallout from collapsed asset bubbles, not their internal structural problems.The fault for these bubbles sits squarely with all the wise people at the ECB and EU who are now pushing austerity. Somehow they thought everything was fine in the years of the "Great Moderation" even though all the danger signs were flashing bright red. 

Making the people in these countries suffer does not in any obvious way fix their structural problems. It just ruins lives. Yeah, me and my fellow crusaders don't think that's cute. Better to ruin the lives of the elites who caused this crisis.

I Boldly Went Where Every Star Trek Movie and TV Show Has Gone Before by Yglesias

How the Case for Austerity Has Crumbled by Krugman

U.S. Budget Deficit Shrinks Far Faster Than Expected by Annie Lowrey

Triffin dilemma

I agree with many of the economic ideas put forward by Yglesias, Thoma, Krugman, DeLong and Baker (among others like Waldman and Bernstein and others on my bloglist). I've  learned a great deal from them and not just about economics, but about other things that surround the dialogue of econblogging. How to argue and have sense of humor and good attitude, etc. I almost always agree with them on the economics and usually on the politics which is much more subjective.

So it's illuminating to me when they disagree, which is rare, or on when they have differences of emphasis. It's not a competition of course it's just interesting to learn how these smart guys think.

For one thing they all want full employment. That's not the goal of glibertarians or cranks like Tyler Durden at Zero Hedge who's main focus is that it's all a scam to give banks money and America's days are numbered.

Anywaying it's interest how Dean Baker emphasizes the trade deficit and the strong dollar policy of Summers-Rubin, while DeLong and Krugman do not.

DeLong started off working for Summers and Krugman started off dismissing liberals' complaints about trade and NAFTA, as did DeLong. Bush's radicalism and nihilism pushed them both to the left.

Anyway I'm not clear on all of this but I don't think Dean Baker has mentioned monetary policy and the Triffin dilemma in regards to the trade deficit, except that monetary policy effects the exchange rate.

His story here from this morning makes sense to me. If I understand it correctly, the Triffin dilemma is where a reserve currency has to do monetary policy for the world and is posed with a dilemma, an example would can be seen in Europe which has a common currency but not a common banking union nor common fiscal policy.

Either have policy too tight in the center and appropriate for the periphery or it's appropriate for the center and too loose for the periphery. This is what happened in Europe which had appropriate policy for Germany during the 2000s after adoption of the Euro, but was too loose for the periphery. And now it is too tight for the periphery while appropirate for Germany.

I'm not sure how this fits with Rubin's strong dollar policy, but it did help our trading partners boost exports to the detriment of the U.S. export business. Clinton replaced this lost demand with demand from an asset bubble and Bush did the same with a housing bubble.

I think ultimately you can derive demand and full employment from some combination of trade/currency policy, fiscal and monetary policy. Each can be stimulative or not depending on the policies.

virtuous circle

What Does Japan Mean For The Rest of the World? by Tim Duy

Trade Deficits and the Dollar by Dean Baker

In prior posts I have often referred to the run-up in the dollar engineered by the Clinton-Rubin-Summers team in the 1990s as being the root of all evils. The point is that their over-valued dollar policy led to a large trade deficit. The only way the demand lost as a result of the trade deficit (people spending their money overseas rather than here) could be offset was with asset bubbles. 

To fill this demand gap, the Clinton crew gave us the stock bubble in the 1990s and the Bush team gave us the housing bubble in the last decade. In both cases the bubbles crashed with disastrous consequencees, the latter more than the former. (It took us almost 4 years to replace the jobs lost in the 2001 recession, so that downturn was not trivial either.) 

Anyhow, my take away from this story is that, using the advanced economics from Econ 101, we need to get the dollar down. I have made this point in the past and readers have often commented that trade does not appear to be responding as would be predicted from a falling dollar. I would argue otherwise. The graph below shows the non-oil trade deficit measured as a share of GDP against the real value of the dollar.


Source: Bureau of Economic Analysis and the Federal Reserve Board. 

This picture looks pretty much like the textbook story. The dollar has fallen nearly back to its 1995 level and the deficit as a share of GDP has fallen almost back to is 1995-1997 level as well. (There are lags, so trade does not adjust immediately to changes in the dollar's value.) Before anyone starts jumping up and down about pulling oil out of the picture, let me explain.
Oil prices have more than quadrupled over this period causing us to have a much larger deficit from oil imports. (Sorry, I have not deducted oil exports because they were not available from the same table.) Demand for oil is relatively inelastic. This means that when oil prices go up, if nothing else changed, we would expect our trade deficit to rise as the increase in the price of oil more than offsets the decline in quantity. 

The textbook response to the increase in oil prices and the rise in the trade deficit would be that the additional outflow of dollars would cause a further decline in the value of the dollar. This decline in the dollar leads to reduction in imports and an increase in exports, which effectively allows the country to pay for higher priced oil. 

In other words, if we followed the textbook story, we should expect to see a somewhat lower valued dollar today than in 1995 as a result of higher oil prices. This would cause us to have a reduced deficit, or even trade surplus, on non-oil products. This would mean that the dollar has to fall somewhat more than it already has in order to bring our trade deficit back to its mid-90s level. 

It looks to me like the intro textbook story is still doing pretty well.

Monetary Stimulus Is About Domestic Demand Not Exports and "Competitiveness" by Yglesias

Blue-Skying

Yglesias has mentioned this (as have Nixon and Milton Friedman?*)

From Atrios:

Day I sometimes write for elsewhere. Was going to write about how we need to give people free money, but over the weekend everyone got there first.

Just Give People Money by Karl Smith (mentions Chris Hayes)

Thinking Utopian: How about a universal basic income? by Mike Konczal

There's A Way To Give Everyone In America An Income That Conservatives And Liberals Can Both Love by Joe Weisenthal

I don't think conservatives will go for it because they believe people will just spend everything on booze and drugs as soon as they get the check. Plus it will attract immigrants.

Still I think it's a good idea. To stimulate the economy, the Department of Demand Management could add money to people's accounts. To combat inflation and an overheating economy, they could take money out of their accounts. 

Sort of like what the Trading Desk at the New York Fed does with the banks who are primary dealers.

*Friedman has as a negative income tax. Nixon I'm not sure. I think he floated the idea but it got shot down, sort of like when Clinton floated the idea of investing the Social Security trust fund in the stock market. The Wall Street Journal editorial pages blew a gasket because that would be the government appropriating the means of production. I laughed out loud.

Monetary Policy and Equity Prices at the Zero Lower Bound by Carola Binder

Daenerys Targaryen

My comment: 

Yeah she was treated as a slave by Viserys and sold off to Drogo. And when the khalasar was attacking the Sheeple, she talked Drogo into stopping the rapes. As Jorah said, she "has a gentle heart." 

She seems more like the abolitionist John Brown than Lincoln. One of the showrunners described her as being a Joan of Arc type. As she tells Jorah and the spice trader in Quarth, she believes herself special and blessed with magic. She wasn't burned by the fire. She hatched the dragon eggs. No one's going to stand in her way, not Warlocks, not slavetraders. She's on a divine mission.

AV Club reviews "The Bear and the Maiden Fair" from Game of Thrones (newbie)

AV Club reviews "The Bear and the Maiden Fair" from Game of Thrones (expert)

Game of Thrones, Season 3: Lions and dragons and bears. Oh my. By Rachael Larimore and Matthew Yglesias

Recovery in their time by Ryan Avent

Based on this Mr Crafts reckons that central-bank independence could be self-defeating at the zero lower bound. That's interesting, and quite a different argument from the more common recent case against central-bank independence: that at the zero lower bound (and especially when banking systems are in trouble) the central bank needs fiscal help to get the transmission mechanism operating. But is it right? 

When I look at the Fed, for instance, I see three possible ways in which the "foolproof way" has failed to win support. One is an intellectual failure: central bankers may have learned and even supported the foolproof strategy when applied on other economies or in other time periods, but when the solution is put to them as policymakers they are reluctant to abandon inflation targeting, presumably because they perceive the gains to low and stable inflation to be so substantial. In this case, the problem with the foolproof method is that it has not been tried. 

A second possibility is that the Fed has in fact done quite a lot to signal to markets that inflation expectations should be higher. But it has failed to raise inflation expectations much above 2% because of the credibility it has earned as an inflation fighter and the time inconsistency problem mentioned by Mr Crafts. In this case a reduction in political independence may improve central bank policy. 

But a third possibility is that the central bank recognises and would like to try the foolproof strategy but feels constrained by the government, presumably because there is a strong domestic political constituency against higher inflation. In an older population, for example, where the old are generally net creditors and more politically active than young debtors, resistence to higher inflation could be strong. In this case the problem is that the central bank isn't politically independent enough. 

I don't know which problem afflicts which economies. I would have said that Japan falls into the third category; perhaps it did until something—a destabilising catastrophe for example—disturbed that equilibrium. I do appreciate Mr Crafts' reminder that we know how to escape our current doldrums, or used to at any rate.

Which Textbook Is That, Exactly? by Krugman

Iron Man, Iron man/
Does whatever an Iron can/
Makes a crease/
Any size/
Flattens wrinkles/
Smooths out flies/
Look out!/
Here comes the Iron Man.

via Kieran Healy

Escaping liquidity traps: Lessons from the UK’s 1930s escape by Nicholas Crafts

Nevillenomics by Krugman

Nicholas Crafts has a really interesting piece about UK economic policy in the 1930s. The gist is that monetary policy drove recovery through the expectations channel; the Bank of England managed to credibly promise to be irresponsible, that is, to generate inflation. 

But how did they do that? Crafts argues that it was two things: the BoE was not independent, it was just an arm of the Treasury, and the Treasury had a known need to generate some inflation to bring down high debt levels. 

This is very closely related to Gauti Eggertsson’s analysis of Japanese policy(pdf) over the same period: there too the lack of central bank independence combined with a fiscal imperative made it possible to change monetary expectations in an unorthodox way, which was exactly what was needed (although they should have skipped the invading Manchuria part). 

All of this reinforces the important point that, as I put it early in this crisis, we’ve entered a looking-glass world in which virtue is vice and prudence is folly, and in which doing the responsible thing is a recipe for economic failure. 

And it also bodes surprisingly well for Abenomics, which might work in part precisely because of what everyone imagines to be Japan’s biggest problem, its huge public debt.

The Facts Are In and Paul Ryan Is Wrong by Jonathan Chait

(via DeLong)

AV Club reviews "Parts Developed In An Unusual Manner" from Orphan Black

Timely mention of Thatcher-era Britain and the Brixton riots in the context of Sarah's youth. Ding dong the witch is dead! Rust in Peace, Iron Lady.

labor rigidities [sic]

Low Unemployment in Germany: The Story Is Not GDP Growth by Dean Baker

Floyd Norris has a good piece today comparing trends in unemployment rates across countries in the downturn. He notes that Germany alone has seen a drop in its unemployment rate since the downturn began. While he notes that Germany has pursued work sharing policies that have encouraged employers to keep workers on the job working shorter hours, readers may not appreciate the full importance of this policy. 

Growth in Germany and the United States have been virtually identical since the beginning of the downturn. While Germany has a large balance of trade surplus, in contrast to the deficit in the United States, its consumption growth has been weaker.



Source: International Monetary Fund.

Germany is helped in this story by the fact that it has a slower rate of labor force growth, but clearly the difference in growth rates does not explain the fact Germany's unemployment rate has fallen by 2.5 percentage points while unemployment in the United States has risen by 3.0 percentage points.