Justice Kennedy, Bork, Obama and DOMA

ADIEU, DOMA! by Jeffrey Toobin 

(via DeLong)

downward nominal wage rigidity

Potential Mistakes (Wonkish) by Krugman

But right now we have high unemployment combined with more or less stable core inflation. Typical models would interpret this as a sharp rise in the natural rate, from maybe 5.5 to 8 percent. But what it almost surely reflects instead is the stickiness of inflation at low levels; the long-run Phillips curve isnot vertical thanks mainly to downward nominal wage rigidity,and that reality is central to what’s happening now. 

I wish that these were narrow technical issues, of no importance for real-world policy. Unfortunately, they’re not. Understating output gaps leads to excessive demands for austerity and excessive complacency at central banks; this perpetuates the depression; and the longer the depression goes on, the more misleading the standard estimates become. 

So it’s good news that at least somebody in Brussels is aware that there might be a problem.

MMT and never say never

Warren Mosler, a Deficit Lover With a Following by Annie Lowrey

Still, even for those with some knowledge of economics, the tenets of the modern monetary theory can make your head spin. The government does not tax its citizens to pay for federal spending. It taxes them to ensure they use the dollar and to help to regulate demand. Since the government prints the dollar, it can never run out of money and it need never balance its budget, not even to prevent the crowding out of private investment when the economy is humming along.

I have a problem with the hyperbolic claims. It's Keynesiansism with some suspect claims tacked on employing the word "never." Perhaps it is a straw man. But they are right that we shouldn't be worrying about the deficit and that fiscal policy could take the place of monetary policy. The problem is politics and a corrupt elite. But monetary policy has offest fiscal austerity to some extent so I don't understand the MMTers who denigrate the focus on monetary policy. The more mainstream economists are right to focus on it.

Reconciling Modern Monetary Theory with the Wisdom of Mark Thoma by Dean Baker

Stephanie Kelton has a comment.

On a different point: MMT supports tax increases and/or spending cuts to address demand-pull inflation. No different from, say, Abba Lerner or Marriner Eccles. 

The real point of departure for MMTers and textbook Keynesians is, I think, very much bound up in the loanable funds theory of the interest rate (the former rejecting and the latter accepting it). From that follow all sorts of differences re: fiscal sustainability. Scott Fullwiler has written brilliantly on this. 

Wikipedia entry on loanable funds

St. Louis Fed President James Bullard has exited the rogues gallery. Dallas Fed President Fisher has joined its ranks. As has Mankiw.

N. Gregory Mankiw is wrong and Harvard sucks.

Arthur M. Okun, who served under President Lyndon B. Johnson as chairman of the Council of Economic Advisers, wrote that the big trade-off faced by society is between equality and efficiency. We can redistribute income to give everyone a more equal slice of the economic pie, but as we do so we blunt work incentives and the economic pie shrinks, he said. From this perspective, the Democrats are the party of more equality, and the Republicans are the party of more efficiency. 

Republican policies are incredibly inefficient. Example number one is the housing bubble and financial crisis. Their health care system is also one based on extracting rent, like the financial system. Extracting rents, destroying the middle class and raising inequality is inefficient. You get a large output gap and idle resources.

Another view is that the important tradeoff is between community and liberty. As members of society, we have goals we want to achieve with others. But as we reach those shared goals, we are asked to sacrifice some personal freedoms. From this perspective, the Democrats are the party that emphasizes communal values, and the Republicans are the party that emphasizes individual liberty. 

Individual liberty of the rich to be free of moral constraints. Privatize the gains, socialize the losses. With incomes stagnating and poverty growing you lose freedom. Pushing for a metadata panopitcon police-surveillance state does not emphasize individual liberty.

Finally, there is the issue of how much one trusts centralized governmental power. Democrats tend to want to expand the scope of the federal government to improve the lives of the citizenry, while Republicans are more fearful that centralized power leads to abuse and lack of accountability. 

Republicans are fearful that a democratically elected government will contest private power which is extracting rents, committing fraud and exploiting. They are happy to employ central government when it comes to keeping the people down and enforcing their priorities, like voter suppression and the surveillance state. Republicans employ centralized government power to bully labor and engage in patent trollery.

These three answers go a long way to explaining, for example, why Jason and I disagreed on President Obama’s health care reform. Jason saw it as a proper expansion of government’s role to promote the community value that everyone should have access to affordable health insurance. I saw it as a risky expansion of government’s power that reduces individual freedom, dulls incentives and will likely lead to a host of unintended consequences. 

Obamacare promotes efficiency and freedom (more bang for the buck for a healthier and hence more secure and free nation.) It employs accountable government to combat the inefficient health care system.

On health care, and many other public policy discussions, there is room for reasonable people to disagree. I don’t expect to agree with all the advice my friend will give the president in the years to come. But I am confident that the nation will be better off for Jason’s having the president’s ear.

There is room to disagree but not room for outright lies and strawmen arguments. Being a proven hardworking, expert at dishonest rhetoric must be the way one gets hired at Harvard.

FELIX SALMON FIRMLY BELIEVES NOT IN THE INFLATION-EXPECTATIONS IMP, BUT IN THE TIGHTENING TOMMYKNOCKERS... by DeLong

How the Fed lost control of short term interest rates by Gavyn Davies (HT DeLong)

 "The declines in the prices of bonds and many risk assets… have come as surprise to some Fed officials, who thought that their decision to taper the speed of balance sheet expansion in the next 12 months, subject to certain economic conditions, would be seen as entirely separate from their thinking on the path for short rates…. The FOMC under Chairman Bernanke has worked very hard on its forward policy guidance, so there is probably some frustration that the markets have 'misunderstood' the Fed’s intentions. Richard Fisher, the President of the Dallas Fed, said that 'big money does organise itself somewhat like feral hogs', suggesting that markets were deliberately trying to 'break the Fed' by creating enough market turbulence to force the FOMC to continue its asset purchases. This is dubious logic. Investors who dumped bonds after the FOMC meeting would make money if bond prices fell further. They therefore presumably want the Fed to tighten policy, which is the opposite of what Mr Fisher indicates. Nor is it right to suggest that big money 'organises itself' at all; investors act in competition with each other, not in collusion."

...

Narayana Kocherlakota, President of the Minneapolis Fed, has made some concrete suggestions this week on economic thresholds. In the present context, his most important suggestion is that the Fed should say that it will not increase the federal funds rate until the unemployment rate has fallen below 5.5 per cent, which would represent a full one percentage point reduction compared to the present 6.5 per cent threshold. This would be subject to the medium term outlook for inflation remaining below 2.5 per cent. 

It is not clear that all members of the FOMC, several of whom have clearly become very worried about the reach for yield in the financial system, would be willing to go that far. But if the Fed really does want to get short rate expectations back under control, they may need to think very seriously about Mr Kocherlakota’s thresholds.

There are other ways to combat "reaching for yield" other than slow growth and high unemployment. More regulation on leverage and margins (see Alan Blinder on this), financial transaction taxes, etc.

Historic Mistake Watch by Krugman

So what’s the point of Fed communication? Mainly it’s not about the specific numbers; it’s about conveying what kind of central bankers we’re dealing with, and hence what they’re likely to do in the future. Talk of extended easy money can help the economy now precisely because it makes the Fed sound like it’s not a conventionally-minded central bank, eager to snatch away the punch bowl; even asset purchases work mainly because they reinforce that impression of unconventionality. 

But when the Fed starts talking about tapering at a time when unemployment is still very high and inflation below target, it undoes all of that good work; suddenly the FOMC starts sounding once again like a group whose fingers are already twitching as they fight the urge to grab that punch bowl. 

Undoing this damage is going to be very hard. One thing that will matter a lot, however, is the choice of Bernanke’s successor. If she’s a well-known dove, that could help a lot. If he’s, say, someone known for saying things like “stimulus is sugar“, look out below.

Yellen or Romer, not Geithner. My sense is that the Republicans like Corker will filibuster whoever it is.