"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, December 07, 2013

Third Way and Warburg Pincus

Elizabeth Warren and Centrist Democrats Are Already at War by Jonathan Chait

If you go to the Third Way link he provides, a number of the top officers and trustees come from Warburg Pincus, where Geithner ended up.

Borgen and The Returned

Søren the economist rock star! Birgitte!

AV Club reviews "The Election" from Borgen

AV Club reviews "Lucy" from The Returned

Rowe, Harless Williamson and QE

Does house building cause house price inflation? Our Sokal hoax by Nick Rowe

Harless is in comment section making same points below:

Andy Harless tweets on Stephen Williamson (last tweet below is most recent):

"Increasingly I think the key to Williamson's QE->deflation result is neither AS nor abuse of RatEx but a heroic fiscal policy assumption...."

Williamson's heroic fiscal policy assumption results from the fact that he is trying to model a sticky price world w a flexible price model

I call the QE->deflation controversy a draw. Krugman, Rowe, , et al are wrong about what particular silly thing Williamson has done.

DeLong responds to above with ". you need to add coherence mix to understand Williamson, and adding it in different ways produces different silly things"

Harless: If you think fiscal policy determines the price level, it's reasonable to expect *eventual* deflation in response to a ZLB monetary stimulus

Realistically, though, if QE causes deflation, it does so by causing today's prices to rise ("inflation") relative to future prices.

Now that (I think) I understand what's going on, I no longer find Williamson's result counterintuitive, just his assumptions too unrealistic

If the world really worked according to Williamson's assumptions, then deflation is exactly what I'd expect from QE."

Stephen Williamson's blog

Noah Smith's summary of bloggers

David Glasner's take

how to dance to Radiohead

One of my favorites: M83 - Midnight City

marginal propensity to consume and aggregate demand

Standards of evidence by Steve Randy Waldman

Friday, December 06, 2013

Stephen Williamson Gets Stuck at the Zero Lower Bound by David Glasner


interview with Neville Alexander

John Burns:
The day following his release, when Mr. Mandela met hundreds of reporters for his first news conference in nearly 30 years in the terraced garden of Archbishop Desmond Tutu’s residence in Bishopscourt, in the lee of Table Mountain, his message of reconciliation found its most powerful expression...

But it was an act of particular kindness that remains lodged most powerfully in the memory. As the news conference unfolded, a white reporter stepped forward and identified himself as Clarence Keyter, the chief political correspondent of the Afrikaans-language service of the state-run broadcasting monopoly, SABC. As he asked his question, Mr. Keyter seemed deeply apprehensive — perhaps not surprising, considering that the SABC had served unswervingly, for decades, as the legitimizing voice of apartheid.

Sensing Mr. Keyter’s unease, Mr. Mandela rose from his seat, walked forward a dozen paces, shook the reporter’s hand and thanked him, saying that in his last years in prison, when he had been given a radio, he had relied on Mr. Keyter’s reports to learn “what was going on in my country.” Mr. Keyter, stunned, had tears welling in his eyes. The rest of us knew then, if we didn’t before, that in Mr. Mandela, the country had a man who was capable — if anybody was — of healing the historical wounds that had made South Africa so tragic for so long.

Thursday, December 05, 2013


Does QE cause deflation? by Noah Smith

Bernanke's June taper-talk caused interest rates to rise.

Another trolly post by Smith:

When teaching econ, start with the parts that work 

edit: added:

How should we empirically verify whether QE increased or decreased inflation?  by Tony Yates

faster third quarter growth, mostly due to inventory build-up

Smart GDP Pop but a Lot of It Is Noisy Inventories by Jared Bernstein
U.S. Growth Faster Than Estimated as Businesses Stock Up
The economy expanded much faster than first thought in the third quarter, as the government on Thursday revised its estimate of growth in the period to a 3.6 percent annual rate from 2.8 percent.

That was significantly better than the 3.1 percent pace economists had been expecting, and it marked the best quarter for growth since the first quarter of 2012, when output jumped by 3.7 percent. It also marked the first time since then that growth had exceeded 3 percent.

Much of the improvement came from additional stocking up on inventory by businesses as well as a slightly improved trade picture.

Inventory changes are notoriously volatile, so while the healthier signals would be welcomed by economists, inventory gains can essentially pull growth forward into the third quarter, causing fourth-quarter gains to slacken.

Indeed, Wall Street was already estimating that the fourth quarter of 2013 would be much weaker than the third quarter, with growth estimated to run at just below 2 percent, according to Bloomberg News.

The anemic pace of fourth-quarter growth also stems from the fallout of the government shutdown in October, as well as the continuing fiscal drag from spending cuts and tax hikes imposed by Congress earlier in 2013.

Still, if the better data on growth from the Commerce Department on Thursday is followed by more robust numbers Friday for the nation’s November job creation and unemployment, it increases the odds the Federal Reserve will soon ease back on stimulus efforts. The jobs data is scheduled to be released by the Labor Department at 8:30 a.m. Friday.

The labor market data for October was significantly better than expected, despite the government shutdown, and the consensus among economists polled by Bloomberg News is that the economy may have created about 180,000 new jobs in November, while the unemployment rate may have fallen to 7.1 percent from 7.3 percent in October.

Federal Reserve policy makers next meet on Dec. 17 and 18, with an announcement and news conference with the Fed’s chairman, Ben S. Bernanke, scheduled for the afternoon of Dec. 18.

Investors are eager for signs of stronger economic growth after years of only tepid gains, but they are also nervous about how quickly the Fed will step back from its aggressive stimulus efforts and let long-term interest rates begin to inch back up.

“You can never be unhappy with a 3.6 percent number for gross domestic product,” said Ian Shepherdson, chief economist at Pantheon Macreconomics. “But the details are more sobering than the headlines. Apart from the inventory numbers, the revisions are pretty trivial.”

For instance, he said, “Final sales, meaning the demand for goods and services excluding inventories, actually slowed. Either companies thought demand would accelerate and built inventories in anticipation of sales that didn’t happen, or they’re building anticipation of stronger demand in the fourth quarter.”

Mr. Shepherdson added: “It’s very likely we’ll see much slower inventory gains in the fourth quarter.” As a result, if demand doesn’t pick up in the final three months of the year, he explained, growth in the fourth quarter will likely be in the range of 1 percent to 2 percent, he Shepherdson estimated.

Today's Good GDP News Is Actually Bad News by Yglesias

I saw a lot of celebratory tweets just now when the Bureau of Economic Analysis revised its estimate of third quarter GDP upwards to 3.6 percent growth. And, indeed, that's a good number and an upside surprise. But the details are actually quite bad:
The acceleration in real GDP growth in the third quarter primarily reflected an acceleration in private inventory investment, a deceleration in imports, and an acceleration in state and local government spending that were partly offset by decelerations in exports, in PCE, and in nonresidential fixed investment. 
The key phrase here is "private inventory investment" which is when businesses build up their stock of goods. Inventory investment tends to swing. If firms build up inventories of unsold goods in one quarter, they typically spend down that inventory in the next quarter. The workhorses of exports (selling stuff to foreigners), PCE (selling stuff to Americans), and nonresidential fixed investment (so companies can make the stuff they sell to foreigners and to Americans) all decelerated.
Relatedly, Gross Domestic Income—an alternative procedure for counting up the same concept that GDP measures—rose only 1.4 percent in this report. The GDI approach is generally more accurate, further underscoring there are a lot of dark clouds to this silver lining.

Obama's inequality speech

Inequality is ‘the defining issue of our time’ by Greg Sargent

Wednesday, December 04, 2013


Yes more exports, but even more imports than exports as domestic demand increases.

Mark A. Sadowski on Abenomics
Observations on the Efficacy of Monetary and Fiscal Policy - Econbrowser

"Real net exports have increased since the last quarter of 2012. While the increase is modest, it is an increase; in contrast, in nominal terms, net exports continue to decline in both absolute terms, and as a share of nominal GDP."

Although Japanese nominal exports have surged by 15.2% between 2012Q4 and 2013Q3, nominal imports are up by even more, or by 16.5%:


Devaluation improves a country’s trade balance only if the Marshall-Lerner condition on trade elasticities holds, and research shows that they’re not met in the majority of cases, either past or present:


That's not to say that currency devaluation isn't beneficial, of course it is, but the benefit flows primarily from increased domestic demand. Here is a study of the competitive devaluations of the Great Depression by Barry Eichengreen and Douglas Irwin:


The Great Depression is a particularly important historical example because then, as now, most of the advanced world was up against the zero lower bound in policy interest rates.

An examination of Figure 4 on page 48 reveals that the only countries that experienced import growth from 1928 to 1935 (the UK, Japan, Sweden and Norway) were members of the sterling block that devalued early (1931). In most of these countries net exports actually declined over the period because imports rose more than exports.

The order of recovery from the Great Depression follows the order in which they abandoned the gold standard perfectly:


But this wasn't because of increased net exports.

The US devalued in 1933 which immediately led to a swift recovery from the Great Depression. Nominal exports doubled from 1933 to 1937. But nominal imports increased by 110.5%:


As a result net exports went from a small surplus (about 0.2% of nominal GDP) to being roughly in balance.

France was part of the Gold bloc of countries that devalued late (1936). From 1936 to 1938 nominal exports increased by 95.4% and nominal imports increased by 80.9%:


However, since imports were already substantially greater than exports, the nominal deficit actually increased by 55.4%.

Japan’s original ryōteki kin’yū kanwa (QE) was officially announced in March 2001 and concluded in March 2006. The following is a graph of the BOJ’s estimate of Japan’s real effective exchange rate which is trade weighted with respect to 16 different currencies and takes into account their relative inflation rates:


The real effective exchange rate fell from 116.25 in February 2001 to 91.09 by March 2006, when the BOJ announced the completion of QE, a decline of 21.6%.

Exports rose from 10.2% of nominal GDP in 2001Q4 to 19.3% of GDP in 2008Q3. Imports rose from 9.4% of GDP in 2001Q4 to 19.5% of GDP in 2008Q3. From 2002Q1 to 2008Q1 real (adjusted by the GDP implicit price deflator) grew at an average annual rate of 11.0%. Real imports grew at an average annual rate of 12.1%.

So there was boom in both exports and imports. But imports grew faster than exports, and net exports actually moved from surplus (0.8% of GDP) to deficit
(-0.2% of GDP) between 2001Q4 and 2008Q3:


It's very telling that today the only major currency area up against the zero lower bound in interest rates that hasn't done QE (the Euro Area) is also the only major currency zone where the trade balance has improved substantially since 2009, going from 0.6% of GDP in 2009Q1 to 3.5% of GDP in 2013Q2:


But this has occurred in large part because nominal imports have been falling since 2012Q3 due to falling domestic demand. Nominal exports have barely changed since 2012Q3.

post-bubble inflation

Economists and Inflation: It's Also Interest Rates, not Just Wages by Dean Baker
Binyamin Appelbaum had an interesting post about how many economists would like to see a higher rate of inflation to help recover from the downturn. The piece emphasizes the role of inflation in lowering real wages, with the argument that lower real wages are necessary to increase employment.

While there may be some truth to this point, it is worth fleshing out the argument more fully. At any point in time, there are sectors in which demand is increasing and we would expect to see rising real wages and also sectors where demand is falling and we would expect to see real wages do the same (e.g. Wall Street traders -- okay, that was a dream).

Anyhow, when inflation is very low, the only way to bring about declines in real wages in these sectors is by having lower nominal wages. Since workers resist nominal pay cuts, we end up not having this adjustment and therefore we end up with fewer jobs than would otherwise be the case. However it is an important qualification in this story that it is not about reducing real wages for all workers, only for some subset.

The other important point is that higher inflation promotes growth in other ways. First and foremost it makes investment more profitable by reducing real interest rates. Firms are considering spending money today to sell more output (e.g. software, computers, Twitter derivatives etc.) in the future. If they expect to sell this output for higher prices because of inflation, then they will find it more profitable to invest today. If we can keep interest rates more or less constant and raise the expected rate of inflation, then firms will have much more incentive to invest. This process seems to be working successfully in Japan at the moment.

Finally, inflation reduces debt burdens. Everyone who has debt in nominal dollars, such as homeowners, students, state and local governments, and the national government, will see the real value of its debt fall in response to inflation. This reduces their debt burden and makes it easier to spend. This would likely also be an important source of demand growth from higher inflation.

While many economists do emphasize the wage story, to my mind the other parts are likely more important. And, if higher inflation leads to more employment, this will increase workers' bargaining power and allow them to acheive wage gains that are likely to quickly offset any losses due to inflation -- although the Wall Street traders may not make up the lost ground.

Tuesday, December 03, 2013

positive outlook

Let me get this straight:

–Sen. Murray and Rep. Ryan may actually agree on a budget, i.e., top line discretionary spending numbers, that shaves a bit off of the mindless 2014/15 sequester cuts?

–The healthcare.gov website is on the mend—not perfect, but much better.

–Speaker Boehner, as per the link above, is solidly on record against another shutdown; Sen. Cruz is nowhere in sight.

Must one pinch oneself? Is Dysfunction Junction applying for a name change? Is this the beginning of some sort of turnabout?

Surely not, but instead of the usual “everything’s as bad as ever, don’t be fooled!” let’s contemplate one aspect of this (briefly, as I’m on the road, scrunched in an airplane seat that would be a tight fit for a four-year old; btw, here’s a thought: you can’t lean your seat back in coach! Sorry, but unless I’m your dentist, it just doesn’t work).

That aspect is not pretty, I grant you, but it is: disgust. Polls quite clearly reveal that most people, even if they’re not paying that much attention, have pretty much come to loathe the DC dysfunction act.
Three things we learned from today’s Obamacare update by Sarah Kliff
There were 1 million visitors to HealthCare.gov Monday. And there have been 380,000 visitors to HealthCare.gov as of noon today. This is slightly higher traffic than Monday, when 375,000 visitors came to the Web site by noon.

"We know that consumers are actively shopping and enrolling in coverage every day," Medicare spokeswoman Julie Bataille said. "We believe there's an indication that these will grow over time."
 According to Massachusetts, all of the healthy people will sign up last minute in March.

Timothy Geithner is writing a book with Michael Grunwald and it is scheduled to be published in May.

(via David Warsh)

Mark A. Sadowski on Bernanke and Fed policy from 2006 - 2008:
In fact the passage quoted in this post almost makes my head explode.
Bernanke took over the Chair in January 2006. At that point the fed funds rate was 4.25%. The FOMC continued to raise the fed funds rate in quarter point steps until it reached 5.25% in June. By August the yield curve was inverted and remained so through May 2007: 
Every recession since WW II has been preceded by an inverted yield curve in the previous 6-18 months. This is something which is easily controlled by setting short term interest rates. At the time Bernanke dismissed it as something that was not important and partially attributable to things outside of the FOMC's control which really is fundamentally BS.
Year on year nominal GDP growth in the US fell from 6.5% in 2006Q1 to 5.3% in 2006Q3 to 4.3% in 2007Q1 to 3.1% in 2008Q1 to 2.7% in 2008Q2: 
Lehmans Brothers filed for bankruptcy in 2008Q3. So the rate of change in nominal GDP had been falling significantly and steadily for two years before the financial crisis hit with full force. Financial crises are the inevitable result of steadily and significantly falling rates of growth in nominal incomes.
In my opinion this is at least partially attributable to the change in leadership at the Fed. Greenspan, for all of his many failings, was very sensitive to the state of the economy, and I doubt he would have let monetary policy become so contractionary for so long. Bernanke on the other hand is a great believer in Inflation Targeting (IT) and was paying too much attention to inflation. (One can make an argument that this was a regime change, from flexible "constrained discretion" to a rigid IT.)
This probably became an even greater problem in late 2007 and early 2008 when headline inflation surged due to the boom in commodity prices. The FOMC was aware the economy was in the midst of a financial crisis as early as August 2007 due to the spike in credit spreads, and yet they took their time in lowering the fed funds rate. In fact the "credit and liquidity programs" which started in December 2007 were fully sterilized until the very week Lehmans filed for bankruptcy, effectively borrowing liquidity from the general economy to keep the the more troubled parts of the financial sector above water.
I could go on and on about all the monetary policy mistakes made during Bernanke's first three years but the point is this. Warsh is pinning medals on Bush and Bernanke for how well they handled a crisis which they ultimately were responsible for tipping the economy into.

bubblenomics and Baker

No stock bubble.

Is There a Stock Bubble? Joining the NYT Debate by Baker

Housing, regulation and MBS

Subprime MBS With a Govenment Guarantee by Baker