Clinton Fail

The Battle of Fed Succession, 1994 Edition by Dean Baker

The current efforts by Larry Summers' acolytes to have him replace Ben Bernanke as Fed Chair reminded me of a past battle. Back in the first term of the Clinton administration it was not assumed that Alan Greenspan had a lifetime position as Fed chair. Some folks thought that the Democratic president might want to take the opportunity to appoint a Democrat as Fed chair. The Vice-Chair at the time, Alan Blinder, was an obvious choice. Blinder had been a highly respected Princeton professor before joining President Clinton's Council of Economic Advisers and then moving over to the Fed at the start of 1994. 

Anyhow, Alan Greenspan wanted to head off this possibility. Towards this end, he managed to get a major piece in the NYT over a Blinder scandal. At a speech at the annual meeting of central bankers in Jackson Hole, Blinder suggested that central banks, instead of focusing exclusively on inflation, might actually worry a bit about unemployment (the horrors). Anyhow, the resulting outcry sent Blinder back to Princeton and left Greenspan in charge of the Fed for another decade. 

Ah, the good old days!

Quiet Rivalry Over the Next Fed Leader Comes Out of the Shadows by Binyamin Appelbaum

Juicy Juice: Growth and Inequality

Growth and Inequality: Thinking About the Middle-Out Hypothesis by Jared Bernstein

Interesting to think of this in terms of Krugman's objections.

From Obama's Galesburg speech:

In the period after World War II, a growing middle class was the engine of our prosperity. Whether you owned a company, swept its floors, or worked anywhere in between, this country offered you a basic bargain – a sense that your hard work would be rewarded with fair wages and benefits, the chance to buy a home, to save for retirement, and, above all, to hand down a better life for your kids. 

But over time, that engine began to stall. That bargain began to fray. Technology made some jobs obsolete. Global competition sent others overseas. It became harder for unions to fight for the middle class. Washington doled out bigger tax cuts to the rich and smaller minimum wage increases for the working poor. The link between higher productivity and people’s wages and salaries was severed – the income of the top 1% nearly quadrupled from 1979 to 2007, while the typical family’s barely budged. 

Towards the end of those three decades, a housing bubble, credit cards, and a churning financial sector kept the economy artificially juiced up. But by the time I took office in 2009, the bubble had burst, costing millions of Americans their jobs, their homes, and their savings. The decades-long erosion of middle-class security was laid bare for all to see and feel.

What happened? The bargain begin to fray? Impersonal forces like technology, globalization and the decline of unions? Washington policy skewed in favor of the rich. "The link between higher productivity and people’s wages and salaries was severed." After 3 decades the economy was growing as much as it was because of an "artificial juicing." 

Yellen versus Summers

In Tug of War Over New Fed Leader, Some Gender Undertones by Binyamin Appelbaum and Annie Lowrey

Obama's economic history

Andy Harless comments on DeLong's blogpost

You can call it neo-Austrian if you want, but I think the "bubble level of aggregate demand was unsustainable" view is quite consistent with standard Keynesian (actually neo-Wicksellian) macro theory. The Fed is and was targeting the inflation rate at 2%. Given the existence of a risk premium, it's quite possible (and, in my opinion, was the case in 2005) that the natural risk-free real interest rate is less than -2%. If that's the case, there is no full employment equilibrium that is consistent with the Fed's target. The only way to hit the inflation target while maintaining full employment is by creating a disequilibrium, which is by its nature unsustainable. In particular, in this case, the Fed did it by allowing people to be convinced that certain unsafe assets were in fact safe and thus, in effect, temporarily reducing the risk premium and allowing a positive nominal risk-free interest rate to support full employment.

Summers-fest

Larry Summers' Bad Math by Dean Baker

Furthermore, we still have the basic math problem that he left us from his years in the Clinton administration, how do we fill the gap in demand that resulted from his high dollar policy. While a subsequent fall in the dollar has reduced the trade deficit, it is still close to 4.0 percent of GDP ($640 billion). This can be filled by the government’s deficit spending, but Summers has repeatedly warned that this is only a short-term strategy. 

So how does Summer want to solve the math problem? Is he going to push for another bubble to juice the economy again or perhaps he has changed his mind and decided that a strong dollar really wasn’t such a good idea after all. 

Anyhow, there is no way around this math. You either want a lower dollar, you want to sustain high budget deficits, you want another bubble, or you want high unemployment. That is the math, what is Summers’ answer? We should know this before he gets appointed to the country’s most important economic post.

EZRA KLEIN AND EVAN SOLTAS: "IF THE PRESIDENT IS MAKING ANY CALLS HIMSELF, HE IS MAKING VERY FEW OF THEM" by DeLong

Obama's economic history

Stiglitz, Minsky, and Obama by Krugman

Personally, I’m more of a Minskyite than a Stiglitzian, although not 100%; although things like subprime lending were, I believe, mainly about forgetting the past, Elizabeth Warren’s old work on bankruptcy pretty clearly shows that at least some families took on excess debt as a result of rising inequality. But I’m inherently suspicious of any story that makes economics a morality play in which all bad results come from things you consider bad for other reasons too; making soaring inequality the cause of our macro woes too is a bit too, well, comfortable for us liberals. 

Also, there’s a danger in the Stiglitzian approach, namely that people might conclude that fixing the short-run shortfall in demand must wait until we fix the long-run problem of inequality, which is going to be very hard and a long time coming. We need stimulus, or at least an end to austerity, now, even if restoring a middle-class society isn’t going to happen any time soon. 

I wouldn’t make too much of these differences; in practice Stiglitzians and Minskyites agree on what should be done,and it’s good to see the president finally talking about the right things. Still, it is interesting to see where he put his emphasis.

(emphasis added)

The Way Way Back

It's a good movie starring Negative Outlook? favorite Annasophia Robb. She's 19 now so it's not SO creepy to blog about her.* It's a funny, touching movie made by the same folks who made Juno and Little Miss Sunshine. 

Robb plays Susanna, who is vacationing at a summer home with her fun alcoholic mother played by Allison Janney and her younger brother Peter who has a wandering eye along the lines of Peter Lorre and Marty Feldman. Susanna's father had come out of the closet in the recent past and left her mother. She loves her father very much and misses him and so is kind of down in the dumps. Plus her mother is hurting even if she puts on a good front in public.

Susanna doesn't really connect with the other girls her age who are hanging out on the beach and so seems kind of lonesome. Things turn around when people arrive at the summer home next door. They are an unmarried couple who have recently started dating. Each has a child they have brought along. One is a 14-year-old boy named Duncan who is down in dumps like Susanna because his mom (Toni Collette) has a boyfriend (Steve Carrell) who's a dick. The boyfriend brought along a daughter who is rude to Duncan as well. Even though Duncan is younger, Susanna sees something in him and sympathizes with his misery, and she repeatedly attempts to strike up conversations with the awkward and socially-inept Duncan.

Duncan is grateful for Susanna's kindness towards him but is too unhappy to really do anything about it. His fortune turns for the better as he meets Owen, played by Sam Rockwell, a manager of the local water park. Owen hires Duncan and becomes his fun, insightful guru thereby helping Duncan pull himself out of his funk.

Duncan is secretive about where he goes during the day, but Susanna finally takes some initiative and follows him to work one day. The new improved Duncan** is now more receptive and confident and a friendship blooms between the two.***

Still, the Way Way Back is a dramady, not a pure comedy, so some drama upsets Duncan's summer fun. His mother's boyfriend is still a dick and he cheats on her with a woman played by Amanda Peet**** So they decide to go back home and take Duncan with them. Before he leaves, Duncan does receive a parting kiss on the lips from Susanna and seems strangely content when his mom joins him in the way, way back seat***** of the station-wagon right before the fade-to-black music and credits role. And yet I believe he fails to appreciate how close to nirvana he really came. For a person as unhappy as he was, it was enough to come across two kind souls like Owen and Susanna and share some summer adventures. Now the future doesn't look so bleak.

Susanna herself seemed to brighten after making a connection with the lost Duncan. She was no longer alone among the girls she couldn't connect with and a mom in mourning for her marriage and husband.

-------------------------
*Nonetheless it still is, we are forced admit.
**Thanks to Sam Rockwell's Owen.
***Basically Duncan has just hit the jackpot.
****Wife of David Benioff, HBO's Game of Thrones' co-creator.
*****Hence the title.

Chinn on Yellen's prescience

Prescience, 2007 edition by Menzie Chinn

Konczal on Summers and Housing

Yellen, Summers and Rebuilding After the Fire by Mike Konczal

...Given what this blog normally covers, I’d be remiss to not mention housing and financial reform. During the Obama transition, Larry Summers promised “substantial resources of $50-100B to a sweeping effort to address the foreclosure crisis” as well as “reforming our bankruptcy laws.” This letter was crucial in securing votes from Democrats like Jeff Merkley for the second round of TARP bailouts. A recent check showed that the administration ended up using only $4.4 billion on foreclosure mitigation through the awful HAMP program, while Summers reportedly was not supportive of bankruptcy reform.

More Battles to Come, but First a ‘Sunny’ Interlude by David Itzkoff

...For most episodes of “It’s Always Sunny,” the proudly depraved FX comedy about miscreant friends who run their own bar, the stars and producers Rob McElhenney, Glenn Howerton and Charlie Day keep the writing assignments to themselves and their like-minded colleagues. 

But for this installment, the three (presently gathered beneath an overhang, waiting for the rain to pass) entrusted those duties to David Benioff and D. B. Weiss, the creators and show runners of the starkly brutal HBO fantasy “Game of Thrones.”

...When Mr. Weiss and Mr. Benioff hit upon an idea for “It’s Always Sunny” — a gloss on the novel and short story “Flowers for Algernon,” in which Mr. Day’s ne’er-do-well character is convinced that a scientific experiment is making him smarter — they suggested it to Mr. McElhenney.

DeLong: Obama turns neo-austrian

*facepalm*

OBAMA ON THE ECONOMY IN GALESBURG: STUBBORN POWER OF FALSE NEO-AUSTRIAN NARRATIVES WEBLOGGING by DeLong

Obama turns neo-Austrian:

Towards the end of those three decades, a housing bubble, credit cards, and a churning financial sector kept the economy artificially juiced up. But by the time I took office in 2009, the bubble had burst, costing millions of Americans their jobs, their homes, and their savings. The decades-long erosion of middle-class security was laid bare for all to see and feel.

This analysis is, you will not be surprised to see, in my view simply wrong.

We have had three things go wrong:

1. A thirty-year failure of economic growth to be equitable growth.
2. A six-year macroeconomic disaster caused by a shortage of aggregate demand that was driven by a collapse of the credit channel.
3. An economy that in the mid-2000s spent too much of its energy building houses and transferring financial assets.

Of these, the first is by far the biggest, the second is also huge, and the third is relatively minor.

But there is no sense in which the level of employment or of GDP that we had in the mid-2000s was unsustainable, or the result of any artificial juicing of an economy. We know what an economy that is artificially juiced beyond its sustainable productive potential looks like: it has rising inflation. That is not what the economy of the mid-2000s looked like:

That is not at all what the economy of the mid-2000s looked like.

And yet there's Dean Baker's point of the $8 trillion housing bubble. That demand was artificial in that it wasn't sustainable and it was "juicing" the economy. It could have been juiced up to its potential instead of beyond its potential.

It needed replacing after it vanished. And yet monetary and fiscal policy in the recovery has been subpar in that there has been the opposite of "juicing" from the state and local governments. Obama's stimulus was by and large canceled out by cuts at the state and local level. After 2010, there were cuts at the federal level as the private sector picked up modestly with help from the Fed.

My half-baked comment (probably will be moderated away):

The housing bubble "juiced-up" the economy in the sense that it wasn't sustainable. Once it popped, the demand generated by the bubble would need to be replaced by something else. I do think there is more to the story which he describes in point 2: "A six-year macroeconomic disaster caused by a shortage of aggregate demand that was driven by a collapse of the credit channel." Before the credit channel collapsed, it was misallocating into an unsustainable area. Now it's not even misallocating.

Ygelsias: it was an anti-Summers leak

Probably.

The Extremely Effective Leak Campaign Against Larry Summers by Yglesias

Yellen for Fed chair (Romer would be better!)

Larry Summers is the Front-Runner? WTF? by Thoma

and via commenter Sadowski:

Larry Summers is unqualified to be Fed chair by Scott Sumner

Just shoot me by Scott Sumner

Do Larry Summers and Janet Yellen Disagree About Monetary Policy? by Yglesias

In the financial crisis behind-the-scenes books Summers comes off better than I would have guessed. He sided with Romer on somethings. He wanted to nationalize Citigroup. He has argued for more fiscal policy stimulus.

Scott Sumner on blogs:

Saturos asked me for areas where my views have been changed by bloggers.  I’d rather talk about bloggers who have influenced me.  MR is probably my favorite blog, but I’d single out 4 bloggers who often get me to rethink my assumptions; Bryan Caplan, Robin Hanson, Matt Yglesias and Paul Krugman.  In all four cases they often make claims with which I disagree.  After reading their arguments I still often disagree.  But I find that they seriously undermine my confidence in my own position.  That is, I find it hard to refute their arguments, even if the conclusion seems annoying.  Once and a while I am converted. 

In some cases (such as the Cowen and the Tabarrok/Yglesias examples mentioned by Noah Smith), I have vague and free-floating intuitions that suddenly solidify into strong coherent arguments.  In others I go from strongly supporting X, to having some doubts.  It’s rarely a 180 degree turn. 

I’d add that Yglesias influences me more than Krugman for two reasons.  First, he focuses more on narrow issues that interest me, such as progressive consumption taxes. (Has Krugman ever mentioned those?)  Yglesias does read my blog, and seems to be more a part of the monetary policy conversation as I see it.  Krugman almost never even nods to the monetary offset point.  He has a wider audience.  And second, Yglesias seems to come to positions from a more ideologically neutral perspective than Krugman.  That allows me to dismiss some Krugman arguments as “biased,” even if I really should not be doing so. 

I probably shouldn’t have started this list, as I don’t know where to stop.  I like lots of the MM bloggers, but tend to already agree on most points.  Ditto for Ryan Avent.  Other talented bloggers like DeLong I don’t read as often, purely due to lack of time.  I’m always running behind these days.  Even the two teenage econ bloggers (Soltas and Wang), have influenced me on a few points.

 I wouldn't be that surprised if Summers was relatively good as Fed chair. But then again I wouldn't be that surprised if he was complacent as Bernanke was.

McDonalds and bubble-fighting

"The Labouring Classes Should Have a Taste for Comforts and Enjoyments" by JW Mason

Graeber Cycles and the Wicksellian Judgment Day by JW Mason

Is money a liability? by Nick Rowe

Beyond Capital: The Case for a Harmonized Response to Asset Bubbles by Sarah Bloom Raskin

The last two links via Carola Binder. (via Thoma)

Hitch

Amis, McEwan and Rushdie Properly Celebrate the Not-So-Proper Modern British Novel

On Monday, as corks were still popping across London in celebration of the new royal baby, a sellout crowd gathered at the 92nd Street Y in Manhattan for a different celebration of Englishness. 

The occasion was a rare joint appearance by Martin Amis, Ian McEwan and Salman Rushdie, the literary equivalent of a concert by the Three Tenors — or perhaps a friendlier version of the Yalta conference, with three longtime allies jostling to carve up whatever territory might still be controlled by big-dude British literary novelists of a certain age.

...Those things, on Monday, included wry and often unprintable reminiscences about 1970s London literary life and the trio’s late and still-lamented friend Christopher Hitchens.

“I feel there should almost be an empty chair here,” Mr. Rushdie said, before going on to recall Mr. Hitchens’s fondness for word-substitution games. One of the more family-friendly ones: substitute “hysterical sex” for “love” in famous titles, as in “Hysterical Sex in the Time of Cholera.” 

...Another person asked about the legacy of Mr. Hitchens, who died of cancer in 2011. 

Mr. McEwan recalled helping Mr. Hitchens out of bed in his last days to finish a 3,000-word essay about G. K. Chesterton, with facts and quotations pulled largely from memory. 

The world will “never get that same combination of life and genes again,” Mr. McEwan said.

Middle-Out Economics

Middle-Out Economics by Thoma

Has the administration finally realized that we ought to do something about stagnating wages, the millions of unemployed, etc.? Is this a serious effort, or is it, as in the past, mostly just for show (I'll believe it when I see some of it actually happening)?:

President Obama Needs to Ground “Middle-Out” Economics in Broad-Based Wage Growth

by Larry Mishel, EPI

Tomorrow at Knox College, President Obama will kick off a series of speeches outlining his vision for rebuilding the U.S. economy. He is expected to talk about how the economy works best when it grows from the “middle-out,” not from the top down.

Growing from the middle out is indeed the right approach to economic growth. I hope that President Obama will get to the heart of the matter, which is that, adjusted for inflation, wages and benefits for the vast majority of workers have not grown in ten years. This is true even for college graduates, including those in business occupations or in STEM fields, whose wages have been stagnant since 2002. Low and middle-wage workers, meanwhile, have not seen much wage growth since 1979. Corporate profits, on the other hand, are at historic highs. Income growth in the United States has been captured by those in the top one percent, driven by high profitability and by the tremendous wage growth among executives and in the finance sector.

The real challenge is how to generate broad-based real wage growth, which was only present during the last three decades for a few short years at the end of the 1990s.

To generate wage growth, we will need to rapidly lower unemployment, which can only be accomplished by large scale public investments and the reestablishment of state and local public services that were cut in the Great Recession and its aftermath. The priority has to be jobs now, rather than any deficit reduction... Overall, it means paying attention to job quality and wage growth as a key priority in and of itself, and as a mechanism for economic growth and economic security for the vast majority. ...

The econ blogosphere has changed my mind about... by Cardiff Garcia

Jaegers versus Kaiju

The Pacific Rim economies of California and Japan point the way forward. Progressive demand management versus austerity, rent-seeking and the redistribution of wealth upwards. 

via commenter "paine"

We're Taxing the Rich... and So Can You

“There is no alternative to austerity,” insist the rich, along with their politicians, foundations, think tanks, and media. 

They’ve been saying it for decades. “Taxes are bad,” they also claim. “Government doesn’t work. And public employees are greedy.” 

Consequently, common wisdom had it that “you can’t raise taxes.” Even people who should have known better believed this—while the public sector slid down the tubes. 

So how did Proposition 30 succeed? This measure, passed by voters last November, raises $6 billion a year for schools and services—in California, a supposedly “anti-tax” state. The money comes mostly through an income tax hike on rich people, along with a tiny sales tax increase of ¼ percent. 

The story should be better known, because with the right preparation, you could make it happen in your state, too.

Election Win by Ruling Party Signals Change in Japan

TOKYO — Japanese voters handed a landslide victory to the governing Liberal Democrats in parliamentary elections on Sunday, strengthening the grip of a party that promises accelerated changes to Japan’s economy and a shift away from its postwar pacifism. 

By securing control of both houses of Parliament for up to three years, the win offers Prime Minister Shinzo Abe — an outspoken nationalist who promises to revitalize Japan’s deflationary economy and strengthen its military — the chance to be the most transformative leader in a decade. Although a lackluster turnout indicated that Mr. Abe might not have as much of a mandate as his supporters hoped, the margin of victory was large enough to suggest he has an opportunity to also bring stability to the country’s leadership after years of short-lived and ineffective prime ministers.

2008-2013 and beyond

Liquidity Trap

There Is No Liquidity Trap: Understanding 21st Century Monetary Policy by Joseph E. Gagnon

(via DeLong)