optimal policy and debt scolds

Years of Tragic Waste by Krugman

But wouldn’t the kind of spending program I’m suggesting have meant more debt? Yes — according to my rough calculation, at this point federal debt held by the public would have been about $1 trillion more than it actually is. But alarmist warnings about the dangers of modestly higher debt have proved false. Meanwhile, the economy would also have been stronger, so that the ratio of debt to G.D.P. — the usual measure of a country’s fiscal position — would have been only a few points higher. Does anyone seriously think that this difference would have provoked a fiscal crisis?

And, on the other side of the ledger, we would be a richer nation, with a brighter future — not a nation where millions of discouraged Americans have probably dropped permanently out of the labor force, where millions of young Americans have probably seen their lifetime career prospects permanently damaged, where cuts in public investment have inflicted long-term damage on our infrastructure and our educational system.

Look, I know that as a political matter an adequate job-creation program was never a real possibility. And it’s not just the politicians who fell short: Many economists, instead of pointing the way toward a solution of the jobs crisis, became part of the problem, fueling exaggerated fears of inflation and debt.

let em work it out

Seems cynical and callous.

Israel Backs Limited Strike Against Syria

When the uprising began, many here saw Mr. Assad, who like his predecessor and father had maintained quiet on the border, as “the devil you know,” and therefore preferable to the rebels, some of whom were aligned with Al Qaeda or Sunni militants like the Palestinian Hamas faction.  

As the death toll has mounted, more Israelis joined a camp led by Amos Yadlin, a former head of Israeli military intelligence, who argues that the devil you know is, actually, a devil who should be ousted sooner rather than later.  

That split remains. But as hopes have dimmed for the emergence of a moderate, secular rebel force that might forge democratic change and even constructive dialogue with Israel, a third approach has gained traction: Let the bad guys burn themselves out.  

“The perpetuation of the conflict is absolutely serving Israel’s interest,” said Nathan Thrall, a Jerusalem-based analyst for the International Crisis Group.  

Tamara Cofman Wittes, director of the Saban Center for Middle East Policy at the Brookings Institution, was one of several experts who said this view differs from the callous “let them all kill each other” shrug popular here during the long-running Iran-Iraq war. Rather, Ms. Wittes said, the reasoning behind a strike that would not significantly change the Syrian landscape is that the West needs more time to prop up opposition forces it finds more palatable and prepare them for future governing. 

She cited dangers for Israel if the conflict continues to drag on, including more efforts to transfer advanced weapons to Hezbollah, instability in Lebanon and pressure on Jordan.

Iraqis, Looking Across Border, See Replays of Past and Fears for the Future

As Qaeda-allied rebels took on a growing role in Syria, that case became harder to make. And while the Iraqi government has maintained in public that it is neutral on Syria, and wishes only for a political solution, the reality is that the Shiite ruling class here is rooting for an Assad victory. 

Last week, as the debate over possible military strikes on Syria intensified in Washington, Mr. Maliki met here with the American ambassador, Robert S. Beecroft, to voice his opposition.  

Afterward, in an interview, Ali al-Mousawi, Mr. Maliki’s spokesman, summarized the exchange.  

“We told him that such action, as we see it, will not help the Syrian people, and that the regime in Syria will not be affected by such a strike,” said Mr. Mousawi. “But Assad may gain more benefits, support and legitimacy. Therefore, we think that the biggest losers are going to be the people of Syria and the neighboring countries.”

Economics, class and conservative ideology

Don't Mention the War by Seth Ackerman & Mike Beggs

The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.

John Kenneth Galbraith

Kotryna Zukauskaite

Kotryna Zukauskaite

NGDPLT: the guard dog you want

For David Andolfatto: why I switched from IT to NGDPLT by Nick Rowe

We had three guard dogs, named IT, PLT, and NGDPLT, that were all saying about the same thing from 1992 to 2008. The Bank of Canada listened to the first of those three dogs, and things seemed to go pretty well. So we figured IT was a good guard dog. In 2009 things changed. The Bank of Canada kept on listening to the IT dog, and did what was needed to make sure the IT dog stayed fairly quiet. The PLT dog stayed fairly quiet too. But the NGDP dog started barking loudly, telling us that monetary policy was too tight. And when I looked out the window, I saw exactly those symptoms that I normally associate with a random tightening of monetary policy: people having greater difficulty selling things for money; greater ease buying things for money; and a fall in the quantities of things sold for money. I saw exactly the same sort of recession I would expect to see if monetary policy suddenly at random became too tight. The NGDP dog was right to start barking loudly; the IT and PLT dogs failed to warn us of the recessionary burglar.

So I say: get rid of the IT dog and start listening to the NGDPLT dog instead.

[Update: and raising the inflation target is like giving the IT dog a hearing aid in the hope it will do better; and switching to a temporary NGDPLT but only during a recession is like having the NGDPLT dog temporarily replace the IT dog when you already know there's a burglar in the house.]

In comments he writes: "Fiscal policy: given standard arguments for Barrovian tax-smoothing, plus diminishing marginal benefits to government expenditure, I would be wary of distorting micro-optimal fiscal policy to make it do a job that monetary policy should be able to handle."

I would share objections others have on fiscal policy. Multipliers. Implications for inequality and fairness. During downturns the government can make needed infratstructure repairs on the cheap. Also politics. The Fed has become a lightening rod - even with its lackluster performance - because of Congress and austerity.

1970s' firehose of new workers

 Not a monetary phenomenon by Steve Randy Waldman

The root cause of the high-misery-index 1970s was demographics, plain and simple. The deep capital stock of the economy — including fixed capital, organizational capital, and what Arnold Kling describes as “patterns of sustainable specialization and trade” — was simply unprepared for the firehose of new workers. The nation faced a simple choice: employ them, and accept a lower rate of production per worker, or insist on continued productivity growth and tolerate high unemployment. Wisely, I think, we prioritized employment. But there was a bottleneck on the supply-side of the economy. Employed people expect to enjoy increased consumption for their labors, and so put pressure on demand in real terms. The result was high inflation, and would have been under any scenario that absorbed the men, and the women, of the baby boom in so short a period of time. Ultimately, the 1970s were a success story, albeit an uncomfortable success story. Going Volcker in 1973 would not have worked, except with intolerable rates of unemployment and undesirable discouragement of labor force entry. By the early 1980s, the goat was mostly through the snake, so a quick reset of expectations was effective.

John Carpenter AV Club recommendation

John Carpenter plays cowboys and Indians on the red planet with Ghosts Of Mars

emphasis on balancing the budget from Clinton through Bush and Obama

How Did Fiscal Policy Get Turned Upside Down? by Jared Bernstein

Germany

The New York Times Sees the Solution to Euro Zone Imbalances as a Problem by Dean Baker

Using complex economics, it is possible to determine that in order to reduce the southern country trade deficits, it will be necessary for northern countries to see more rapid inflation, thereby raising the price of their output relative to the price of output in southern Europe. However the New York Times see this prospect as a serious problem. A story discussing Germany's relative prosperity told readers:

...

It is also worth noting that Germany's growth has not been quite as impressive as this article implies. Since the beginning of the downturn in 2007 its growth has been virtually identical to growth in the United States. While it does have lower labor force growth, and therefore lower potential growth, the main difference in outcomes has been due to the fact that Germany encourages employers to keep workers on the payroll in a downturn, even at shorter hours, rather than laying them off. In other words, labor market policy rather than growth explains Germany's relative prosperity.

Jon Stewart and Operation Just The Tip

Stewart is back from Iran.

Please change your mind on the Platinum Coin of Freedom, Mr. Stewart! Krugman is usually right! He won a Noble Prize!

NGDP level targeting versus inflation targeting

Reply to David Andolfatto by Scott Sumner

Mark A. Sadowski comments by linking to Woodford interview

And in an interview with Dylan Matthews in September 2012, a couple of weeks after his Jackson Hole speech, Woodford stated that he believed the optimum policy is in fact an Output Gap Adjusted Price Level Target (OGAPLT): 

http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/09/15/michael-woodford-i-personally-would-have-gone-further-but-what-the-fed-did-is-definitely-a-step-in-the-right-direction/ 

An OGAPLT is a corrected PLT where some multiple of the real output gap is added to it. Woodford prefers this modification of PLT because he thinks it is important to also take into account the level of real economic activity. But he also pointed out that NGDP Level Targeting (NGDPLT) is more practical, and is nearly as ideal as OGAPLT. That's why he spoke about NGDPLT at length in his speech at Jackson Hole: 

http://kansascityfed.org/publicat/sympos/2012/mw.pdf

OGAPLT seems similar to Yellen's optimal path policy and/or Yellen could easily move from one to the other.

Summers seems like Mr. Discretionary, but I could be wrong. As Sadowski comments further:

NGDPLT is a rules based policy as opposed to a discretionary policy. Normally people think of discretionary monetary policy as being better in times of high unemployment. But in this particular instance we already essentially have a discretionary monetary policy and it has resulted in a prolonged large output gap with a lengthy spell of elevated unemployment. An NGDPLT rule would prescribe closing the 15% and growing NGDP level gap in a timely fashion as opposed to our current implicitly discretionary policy.

And Woodford's OGAPLT would take the output gap into account as well. Bernanke notes the output gap but seems to show little urgency to close it as quickly as possible. He warns of "losing credibility" over keeping inflation low, but I don't know why. Is it an excuse to mask the politics of the situation with conservatives pushing for tight money?

humanitarian internationalists urge caution

Obama’s National-Security Argument for Striking Syria Is Terrible by Jonathan Chait

An oft-repeated liberal critique of the Bush administration, formulated by Daniel Davies, was that “Good ideas do not need lots of lies told about them in order to gain public acceptance.” I don’t actually agree with that as a hard and fast rule. Sometimes Americans oppose good ideas. (That’s why, for instance, Democrats prefer to defend climate policy as a self-interested stimulus for “green jobs” rather than as a benevolent contribution to the future of humanity.) But the administration’s willingness to stoop to demagogic national-security rationales certainly makes me more suspicious, on the margins, of the merits of the policy itself. Syria may not be Iraq, but the spectacle of administration figures peddling dubious rationales for war is a discomfiting throwback to a decade ago.

Arm and Shame by Tom Friedman

That’s why I think the best response to the use of poison gas by President Bashar al-Assad is not a cruise missile attack on Assad’s forces, but an increase in the training and arming of the Free Syrian Army — including the antitank and antiaircraft weapons it’s long sought. This has three virtues: 1) Better arming responsible rebels units, and they do exist, can really hurt the Assad regime in a sustained way — that is the whole point of deterrence — without exposing America to global opprobrium for bombing Syria; 2) Better arming the rebels actually enables them to protect themselves more effectively from this regime; 3) Better arming the rebels might increase the influence on the ground of the more moderate opposition groups over the jihadist ones — and eventually may put more pressure on Assad, or his allies, to negotiate a political solution. 

By contrast, just limited bombing of Syria from the air makes us look weak at best, even if we hit targets. And if we kill lots of Syrians, it enables Assad to divert attention from the 1,400 he has gassed to death to those we harmed. Also, who knows what else our bombing of Syria could set in motion. (Would Iran decide it must now rush through a nuclear bomb?)

Abenomics

Monetarism Lives! by Scott Summers

Commenter H Wasshoi sent me the minutes of the BOJ’s April meeting:

 A. Vote on the Guideline for Money Market Operations

Based on the above discussions, members agreed that it was appropriate to (1) change the main operating target for money market operations from the uncollateralized overnight call rate to the monetary base and (2) conduct money market operations so that the monetary base would increase at an annual pace of about 60-70 trillion yen.

To reflect this view, the chairman formulated the following proposal and put it to a vote.

The Chairman’s Policy Proposal on the Guideline for Money Market Operations:

1. The main operating target for money market operations will be changed from the uncollateralized overnight call rate to the monetary base.

2. The guideline for money market operations will be as follows.

The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen.

3. A public statement will be decided separately.

Votes for the proposal: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Mr. R. Miyao,

Mr. Y. Morimoto, Ms. S. Shirai, Mr. K. Ishida, Mr. T. Sato, and Mr. T. Kiuchi.

Votes against the proposal: None.

  

That’s roughly $600 to $700 billion per year in an economy 1/3 the size of the US.

So they are switching from interest rate instrument to a monetary base instrument.  And where did the inspiration for this idea come from?  Perhaps many places, but one person in particular is mentioned in the minutes (p. 17):

One member expressed an opinion on the medium- to long-term relationship between the monetary base and the expected inflation rate, as well as on the pace of increase in the monetary base from the viewpoint of the McCallum rule. Members then concurred — while recognizing the necessity of considering the feasibility in terms of the Bank’s market operations — that the Bank could purchase about 7 trillion yen of JGBs on a monthly basis on the premise that all maturities of JGBs were eligible for purchases.

Bennett McCallum is a long time proponent of a policy rule that would adjust the monetary base in such a way as to stabilize NGDP growth.  Ideas have consequences.  I recall he published his proposal way back in 1980. He’s now fairly old.  Don’t let anyone tell you your plan is “politically unrealistic.”  If it’s the right thing to do keep fighting for it relentlessly.  When I’m on my deathbed the last words I mumble will not be “Rosebud,” they will be “NGDP futures targeting.”

FedSim

Introducing FedSim by Evan Soltas

5 Things I Learned from FedSim by Evan Soltas

Hope

Summers the Shiftless by Krugman

Now, we can hope that if Summers actually does get the job, he’ll realize the problem — and realize that he needs to pull his own version of what Abe has pulled off in Japan, saying and doing things that shock people into realizing that he isn’t going to be the conventional-wisdom guy they expected. And this is, in fact, my advice to Summers if he is the guy: don’t spend your first few months being mild-mannered and winning friends. What this economy needs is a monetary shock — and if you don’t do it right away, you probably won’t get a second chance.

It's not as if Syria is defending their use of chemical weapons

‘They must be really bad if even Hitler wouldn’t use them’ by Ezra Klein

EK: So that makes it sound like there’s no reason to hit Syria. 

RP: I would word it this way: Bombing Syria would be the strongest possible upholding and reinforcement of the norm. Will the norm fall by the wayside if that doesn’t happen? No, I don’t think it will. But if there was a strike to enforce it, that would be a watershed moment in many respects. Norms regarding warfare have often been quite effective, like the treatment of prisoners of war. They’re sometimes violated, of course, but a lot of them are treated with a minimal level of decency. These norms trudge on, despite violations, because of beliefs about reciprocity and decency. One violation does not destroy a norm. What matters is how people respond to it. 

And you’ll notice something strange about this episode. It’s not as if Syria is defending their use of chemical weapons. They’re denying it. And that helps contribute to the notion this is an unacceptable process. In World War I, the Germans argued that gas might be more humane than bayonets or getting blown up. Some people think that the Bush administration’s view on enhanced interrogation techniques struck a real blow against norms against torture. No one is defending chemical warfare. All the dynamics here have served to highlight that this is a salient norm in global politics today.

Assad's not going to pull a Ben Ali and leave for Iran

When Chemical Weapons Are Smart Politics by Joshua Keating

He talks to the authors of the Dictator's Handbook who say:

First of all, using chemical weapons has absolutely cemented that for Assad there can be no soft landing. That has two effects: Domestically, it has signaled to his coalition that they should stick with him. He’s there for the long run and there’s no easy way out for him, so they know he won’t desert them. These crimes against humanity have also made it very clear that it’s going to be very bad for the Alawites if there’s any political transition, which makes them even more loyal to him. They have nowhere else to go. 

It’s also been a brilliant play internationally. The extent of the chemical weapons has not be so much that Obama’s willing to put ground forces in. The airstrikes they are discussing are unlikely to be a decisive military factor. And Russia and Iran would love to snub the nose of the U.S. and this is a perfect way to do it. The U.S. is going to have to go it alone if they do it, and this is a great way for Russia and Iran to make the U.S. look impotent and pathetic. Russia’s going to continue supplying [Assad] with weapons and Iran’s going to keep supplying him with money. So this was actually a brilliant play from him.

This makes Iran, Russia, and China look bad. The long term goal of the U.S. should be to change Russian and Iranian attitudes such that they don't love to snub the nose of the U.S.

How did the West convince Yeltsin to let go of Milosevic? It was after the Russian debt default and Putin took over shortly afterwards.

Quantative Easing

Misconceptions About Fed’s Bond Buying by Joseph E. Gagnon

(via DeLong)

Under the Dumb

Only 2 episodes left!

AV Club reviews "Speak of the Devil" from Under the Dome.

Crimes of Saddam and Assad

Bashar al-Assad

1) violently cracked down on peaceful protests which sparked a civil war.

2) allegedly used Sarin Gas to kill 1400 Syrians including 400 children. Sarin gas is a nerve agent. It was classified as a WMD in UNSC Resolution 687.

3) invaded nobody*

Saddam Hussein

1) invaded Iran and started Iran-Iraq war.

2) committed genocide against Iraqi Kurds, named the the al-Anfal campaign

3) On 16 March 1988, the Kurdish town of Halabja was attacked with a mix of mustard gas and nerve agents, killing 5,000 civilians, and maiming, disfiguring, or seriously debilitating 10,000 more.

4) invaded and annexed a Kuwait, a member of the United Nations

5) Persian Gulf War and the massacre of the Shia in southern Iraq

6) defied UN weapon inspectors

Obama explicitly said he doesn't want an invasion and occupation of Syria, but things could spiral out of control.

*Added: I forgot to add Syria's involvement in Lebanon where they assassinated Rafik Hariri in 2005.

Orphan Black

Krugman likes Orphan Black

slippery slope

TWO MINDS ON SYRIA by George Packer

It only escalates if we allow ourselves to get dragged in deeper. Kosovo didn’t escalate.

This isn’t Kosovo. The Syrian rebels aren’t the K.L.A. Assad isn’t Milosevic. Putin isn’t Yeltsin. This is far worse. Kosovo became a U.N. protectorate. That’s not going to happen in Syria.

You think Putin is going to risk a military confrontation with the U.S. and Europe?

I think Russia isn’t going to let Assad go down. Neither is Iran or Hezbollah. So they’ll escalate. This could be the thing that triggers an Israel-Iran war, and how do we stay out of that? My God, it feels like August, 1914.

I'm afraid it will escalate. It may trigger an Israel-Iran war. Once we launch missiles we're involved. (We may be involved by secretly helping the rebels.) There's also the possibility that Israel will feel more alone and may feel the need to go it alone.

Obama said explicitly that military might can't solve this conflict. He said America is war weary and will not send in troops or even take a side or even try to topple Assad.

However it may be just that they'll launch missiles because of the chemical attack and do nothing else. If there's another chemical attack, they'll launch missiles again and do nothing else. And so on. But there is a risk of escalation and retaliation.

Hopefully Obama is counting on the Republicans in the House to block this. My sense is that they'll go along with it. (How much pull do Boehner and AIPAC have?) Rep. King of New York believes the "isolationists" will block it.

If they do go along hopefully Obama doesn't escalate.

latecomer to the Breaking Bad bandwagon

Breaking Bad, Season 5, Part 2: Everyone gets a case of the stupids by Yglesias

AV Club reviews "Rabid Dog" from Breaking Bad

Maron and addiction

What Marc Maron Taught Me About Addiction by Arjune Rama

Ronstadt and Hanna

Riot Grrrl Back From the Brink

Late in 2010, after six years of a mysterious and debilitating illness that often left her too weak to move or speak, she was finally diagnosed with late-stage Lyme disease. She underwent two years of intensive therapy. Now on the mend, Ms. Hanna is returning in a big way.

Dean Baker recently wrote on his blog that his wife has Lyme disease.

Linda Ronstadt discusses her memoir and Parkinson's

Her memoir is a reminder of how close to the epicenter she once had been. She opened for the Doors (and was unimpressed with Jim Morrison) and toured with Mr. Young, whom she reveres. A highlight of the book is her account of an all-night jam with Mr. Parsons and Mr. Richards, Mr. Parsons disappearing at intervals to ingest more drugs. At one point, Mr. Richards played “Wild Horses,” a new song he had written with Mick Jagger for the next Stones album. Mr. Parsons begged to record it ahead of them. To her astonishment, Mr. Richards complied.

Economics as Science

A Quick Revisit to the “Is Economics a Science?” Debate by Jared Bernstein

Paul Krugman is more specific, though he’s oddly dismissive of the underlying case—“odd” in the sense that he’s constantly (and correctly and compellingly) pointing out the types of devastating economic mistakes I note above. But here he points out that the application of monetary policy in the downturn (at the “zero-lower-bound”) worked in much the way intermediate macro would predict. It’s a valid point; his use of IS-LM in the liquidity trap (where deficit spending has no impact on interest rates but increases GDP) has been consistently insightful and correct, and it provides a good example of an economic model that works. 

But perhaps because he’s in a defensive crouch (there’s that medal, again) he’s missing the larger point: scads of other economists, including other Nobelists, have not only ignored Paul’s insights, they swum in the river de-Nile, arguing that according to their models, interest rates and inflation are about to bust out all over, evidence to the contrary be damned. And they’ve arguably won the day, both here and even more so in Europe. 

Why were they able to do this? Because, as the original article pointed out, in my own words: 

The fact that Paul and others (me too, sometimes!) use its tools effectively shows that economics can be and often is useful. I stressed in my earlier post the extremely valuable role economists can play by citing market failures. But to say, “hey, I used economics and I got something right!” is a very incomplete defense.

Because economics both poses as a hard science and fails to generate reliable predictions, establishing economic facts is an elusive exercise. Battling statistical analyses come to opposite conclusions on the impact of fiscal stimulus, changes in tax rates, wage mandates, regulations, and so on. Into this void steps money and power, such that today we find ourselves with think tanks staffed by economists who provide their clients with the answers they seek. And since those with the deepest pockets can buy the results that best serve their goals, it is increasingly difficult to generate the wealth of evidence needed to offset market failures, inequities, and even existential threats.

12 dimensional chess on Syria and the insane clown posse

Holbo comments

I’m still hoping this is some kind of rope-a-dope, in which Obama goads all the Republicans into coming out against intervention in Syria, because Obama is for it. So then he can fold and say: I’m glad we have bi-partisan consensus on the need to fold our cards this time.

prescience by antiwar liberals

The nation-building problem by John Quiggin (September 21, 2002)

He links to

The Fifty-First State? by James Fallows (November 2002)

It is quite possible that if we went in, took out Saddam Hussein, and then left quickly, the result would be an extremely bloody civil war,” says William Galston, the director of the Institute for Philosophy and Public Policy at the University of Maryland, who was a Marine during the Vietnam War. “That blood would be directly on our hands.”

A Rarity: A Democrat to Lead the Fed by David Leonhardt