liquidity trap and secular stagnation

What Is the Eccles Building Thinking Today? III: The Mysterious Absence of Paul Krugman Thought by DeLong

Economists’ evolving understanding of the zero-rate liquidity trap by Ryan Avent

Motörhead

Sanders on the Fed

To Rein In Wall Street, Fix the Fed by Bernie Sanders

The recent decision by the Fed to raise interest rates is the latest example of the rigged economic system. Big bankers and their supporters in Congress have been telling us for years that runaway inflation is just around the corner. They have been dead wrong each time. Raising interest rates now is a disaster for small business owners who need loans to hire more workers and Americans who need more jobs and higher wages. As a rule, the Fed should not raise interest rates until unemployment is lower than 4 percent. Raising rates must be done only as a last resort — not to fight phantom inflation.

Quiggin and DeLong on Piketty

Piketty and the Australian exception by John Quiggin

The Melting Away of North Atlantic Social Democracy by J. Bradford DeLong

Fed: raise one percent per year

In Denver, Worries That the Fed Will Chill a Sizzling Recovery by Binyamin Appelbaum

Janet L. Yellen, the Fed’s chairwoman, and her colleagues have concluded that the economy is finally strong enough to grow with a little less help from the central bank. Indeed, they worry inflation will rise too quickly if they do not start raising interest rates. The first rate increase will be small, then the Fed expects to raise rates about one percentage point a year for the next few years.

Mogwai - Les Revenant

Yellen on inequality

Perspectives on Inequality and Opportunity from the Survey of Consumer Finances by Janet Yellen

Waldman on the rich

Hard money is not a mistake by Steve Randy Waldman

Sumner on Krugman

Word games: Krugman's odd definition of tight money by Scott Sumner

Piketty seminar

Crooked Timber Piketty seminar

Daenerys Targaryen

Baker on Krugman and Summer

Paul Krugman, Larry Summers, and the Fed's Unused Ammunition by Dean Baker

Paul Krugman and Larry Summers both have very good columns this morning noting the economy's continuing weakness and warning against excessive rate hikes by the Fed. While I fully agree with their assessment of the state of the economy and the dangers of Fed rate hikes, I think they are overly pessimistic about the Fed's scope for action if the economy weakens.

While the Fed did adopt unorthodox monetary policy in this recession in the form of quantitative easing, the buying of long-term debt, it has another tool at its disposal that it chose not to use. Specifically, instead of just targeting the overnight interest rate (now zero), the Fed could have targeted a longer term interest rate.

For example, it could set a target of 1.0 percent as the interest rate for the 5-year Treasury note, committing itself to buy more notes to push up the price, and push down the interest rate to keep it at 1.0 percent. It could even do the same with 10-year Treasury notes.

This is an idea that Joe Gagnon at the Peterson Institute for International Economics put forward at the depth of the recession, but for some reason there was little interest in policy circles. The only obvious risk of going the interest rate targeting route is that it could be inflationary if it led to too rapid an expansion, but excessively high inflation will not be our problem if the economy were to again weaken. Furthermore, if it turned out that targeting was prompting too much growth, the Fed could quickly reverse course and let the interest rate rise back to the market level.

Of course, it would be best if we could count on fiscal policy to play a role in getting us back to full employment (lowering supply through reduced workweeks and work years should also be on the agenda), but the Fed does have more ammunition buried away in the basement and we should be pressing them to use it if the need arises.

Krugman on Reich

Challenging the Oligarchy by Paul Krugman

Supergirl's laser eyes

The episode "Red Faced" has Kara dealing with her anger issues. She's told that humans are terrified of what will happen if Supergirl loses her temper. Her boss advises her to find out what the anger is about behind the anger. By the end of the episode Supergirl concludes that she's angry about having being denied a normal life. Instead, her parents sent her away before her planet expoded and now she has to be a super hero.

Instead of being angry all the time she vows to channel that rage as she does here, channeling it into her heat ray vision.

Bruce Rauner

A Wealthy Governor and His Friends Are Remaking Illinois by Nicholas Confessore

Adair Turner and monetary financing

Between debt and the devil by Adair Turner review by Giles Wilkes

Between Debt and the Devil by Adair Turner review – should the government start printing money? by Tom Clark

The Case for Monetary Finance – An EssentiallyPolitical Issue by Adair Turner (presented at the IMF's Annual Research Conference)

Budgetary sleight-of-hand by Ben Bernanke

Summers on productivity

Is It (just) Hysteresis? Disentangling the Cyclical from the Structural by Lawrence H. Summers

The left's green lantern problem

The Left's Green Lantern Problem by Suzy Khimm

People's QE, Adair Turner and John Cassidy

Why Not Just Print More Money by John Cassidy

Cecchetti & Schoenholtz against people's QE

Learning from Japan: It's Hard to End a Deflation by Cecchetti & Schoenholtz

Krugman on Neel Kashkari the new Minneapolis Fed President

Supply, Demand, and Neel Kashkari by Krugman

So, if the Minneapolis Fed felt the need to maintain conservation of NK, they could have chosen to replace Narayana Kocherlakota with a New Keynesian. Instead, they chose Neel Kashkari. Brad DeLong isn’t happy, and this Twitter exchange suggests that he has good reason to worry.

I’ve written before about the all-too-common fallacy of confusing demand with supply, of arguing that because we had a bubble — so that some component of aggregate demand was unsustainable — the economy as a whole was somehow producing more than its potential. Let me just repeat what I said then:

Just a brief note: one thing that keeps appearing in comments is the notion that because we had a bubble, in which some people were borrowing too much, the economic growth of 2000-2007 wasn’t “real” — that it was all a figment of our imagination. 

This is confusing demand with supply.

We really did produce all the goods and services counted in GDP; we were able to do that because we had willing workers, a sufficient capital stock, the right technology, and so on.
What is true is that some of the spending that created demand for those goods and services was debt-financed, and those debtors can’t continue to spend the way they did. But that doesn’t say that the capacity has somehow ceased to exist; it only says that if we want to keep the capacity in use, someone else has to spend instead. In other words, past growth wasn’t an illusion, or a fraud; but we need policies to sustain aggregate demand.

But now we are about to have a Fed president who says:

How’s this? Growth was artificially fast due to leveraging of econ. Trying to return to that rate thru def spend is futile.

In the words of Charlie Brown, AAUGH!

That word “artificially” is the real telltale, as is Kashkari’s description of Japanese monetary stimulus as “morphine.” It’s straight out of the liquidationist playbook, e.g. Hayek denouncing the use of “artificial stimulants” to fight the Great Depression.

So, great: we now have a liquidationist in a senior position in the Fed system.

Washintong Post editorial board is against People's QE

Big surprise.

The Washington Post is Confused About Central Banks and Democracy by Dean Baker

In an editorial railing against the Republican Congress for reducing the Fed's reserve fund (which is needed in case they forget how to print money), the Washington Post told readers:

"Central bank independence and fiscal transparency are attributes of a healthy democracy and have been throughout history. Many a banana republic, by contrast, has come to grief using its central bank to facilitate government deficit spending. Post-World War I Germany had a similar problem, if memory serves."

Apparently memory isn't serving the Post's editorial writers very well. The Bank of England did not independently set its monetary policy until 1997. Nonetheless, it somehow it managed to avoid hyperinflation and most people probably would still describe the U.K. as a democracy. There are many other examples of central banks, including the Fed during World War II and for six years afterwards, which were not independent of the elected government. In almost none of these cases did countries suffer from hyperinflation.

On the other side, independent central banks in the United States and Europe somehow managed to overlook enormous housing bubbles, the collapse of which sank their economies. In Europe, the collapse has actually caused more economic damage than the Great Depression. Incredibly, none of the bank officials responsible lost their jobs for their extraordinary incompetence.

Unlike dishwashers, truck drivers, or school teachers, independent central bankers are not held responsible for the quality of their performance. In fact, virtually all of the bankers responsible for this disaster will retire with pensions that are an order of magnitude larger than the Social Security checks that so enrage the Post's editorial writers.

how World War I ended

How did the first world war actually end? by  Paul Mason

...
The sailors’ organisation met in in the dark, kneeling between the stones of a war cemetery. This was no Potemkin-style, spontaneous outburst. With extreme order they took over the bridges, ran up red flags and pointed the guns of rebel ships at the hulls of those that did not rebel.
Mutinous sailors

On 4 November 1918 they armed themselves and set off, in their thousands, for the industrial centres of northern Germany. Jan Valtin, a participant, remembered: “That night I saw the mutinous sailors roll into Bremen on caravans of commandeered trucks – from all sides masses of humanity, a sea of swinging, pushing bodies and distorted faces were moving toward the centre of town. Many of the workers were armed with guns, with bayonets and with hammers.”

By 9 November, with workers swarming into the streets of Berlin, the Kaiser abdicated: only the declaration of a republic, with a Labour government and the promised “socialisation of industry”, prevented outright Soviet-style revolution.

For Hitler, the German workers’ role in ending the war became the “stab in the back”: it was his ultimate justification for eradicating the German labour movement after 1933. In the British imperialist version of events the Kiel sailors become useful ancillaries: Yanks and tanks turn the western front and, naturally, the Germans throw the towel in once their front starts to crumble.

But to social historians the German workers’ role in ending the war is no surprise. Because exactly 100 years ago this week, they had also turned out in their hundreds of thousands to try and prevent it starting. The German socialist party was a massive social institution – with libraries, schools, choirs, nurseries – and during the fatal slide to war they called their members onto the streets in every major city.

Then, under the pressure of war fever and fearing their institutions would be outlawed, the socialist leaders swung behind the war effort.

We know now, thanks to the publication of records and memoirs, that it was entirely possible to have stopped the first world war. Key members of the British cabinet were against it; large parts of the social elite in most countries, including Germany, were stunned and appalled by the unstoppable process of mobilisation.

But within 18 months of its outbreak, dissident German socialist MPs were leading mass strikes, demonstrations and riots against the war. Despite censorship, mobilisation and the natural moral solidarity people have with troops sent to the front, the German arms industry was repeatedly hit by strikes after 1916.

When they reached Berlin, the first thing the insurgent sailors did was try to seize its radio tower: their aim was to send a message of solidarity to Russian sailors at Kronstadt in the eastern Baltic Sea, who they had been fighting until a year before.

Larry Summers goes hetero

Larry Summers: Advanced economies are so sick we need a new way to think about them

An e-book containing the papers and presentations from the European Central Bank's central banking forum conference in Sintra, Portugal, is now available. ECB President Mario Draghi and his colleagues are to be greatly commended for running a forum that is so open to profound challenges to central banking orthodoxy.

The volume contains a paper by Olivier Blanchard, Eugenio Cerutti and me on hysteresis — and separately some of my reflections asserting the need for a new Keynesian economics that is more Keynesian and less new.

Here, I summarize these two papers.

Hysteresis effects

Blanchard, Cerutti and I look at a sample of over 100 recessions from industrial countries over the last 50 years and examine their impact on long-run output levels in an effort to understand what Blanchard and I had earlier called hysteresis effects. We find that in the vast majority of cases, output never returns to previous trends. Indeed, there appear to be more cases where recessions reduce the subsequent growth of output than where output returns to trend. In other words “super hysteresis,” to use Larry Ball’s term, is more frequent than “no hysteresis."

This finding does not in-and-of-itself establish the importance of hysteresis effects. It might be that when underlying growth rates fall, recessions follow, but that recessions have no causal impact going forward. In order to address this issue, we look at the impact of recessions with different precursors. We find that even recessions that are associated with disinflationary monetary policies or the drying up of credit have substantial long-run output effects suggesting the presence of hysteresis effects.

In subsequent work, Antonio Fatas and I have looked at the impact of fiscal policy surprises on long-run output and long-run output forecasts, using a methodology pioneered by Blanchard and Daniel Leigh. Because fiscal policy effects operate primarily through aggregate demand, this provides a way to avoid the causation question. We find that fiscal policy changes have large continuing effects on levels of output suggesting the importance of hysteresis.

I was struck that in a vote taken at the conference, close to 90 percent of the participants indicated that they believe there are significant hysteresis effects. While there is much more work to be done, I believe that, as of right now, the right presumption is in favor of hysteresis effects, despite their exclusion from the standard models used in almost all central banks.
Toward a new macroeconomics

My separate comments in the volume develop an idea I have pushed with little success for a long time. Standard new Keynesian macroeconomics essentially abstracts away from most of what is important in macroeconomics. To an even greater extent, this is true of the dynamic stochastic general equilibrium (DSGE) models that are the workhorse of central bank staffs and much practically oriented academic work.

Why? New Keynesian models imply that stabilization policies cannot affect the average level of output over time and that the only effect policy can have is on the amplitude of economic fluctuations, not on the level of output. This assumption is problematic at a number of levels.

First, if stabilization policies cannot affect average levels of employment and output over time, they are not nearly as important as if they can. Beginning the study of stabilization with this assumption takes away much of the motivation for doing macroeconomics.

Second, the assumption is close to absurd. It is surely reasonable to assume that better policy could have avoided the Depression or the huge output losses associated with the financial crisis without having shaved off some previous or subsequent peak.

Third, contrary to the now common view that macroeconomics is best understood by studying the stochastic properties of stationary time series, the most important macroeconomic events are in some sense one off. Think of the Depression or the Great Recession or the high inflation of the 1970s.

The problem has always been that it is difficult to beat something with nothing. This may be changing as topics like hysteresis, secular stagnation, and multiple equilibrium are getting more and more attention.

As well they should. U.S. output is now about 10 percent below a trend estimated through 2007. If one attributes even half of this figure to the effects of recession and assumes no catch up on this component until 2030, the cost of the financial crisis in the U.S. is about one year’s gross domestic product. And matters are worse in the rest of the industrial world.

As macroeconomics was transformed in response to the Depression of the 1930s and the inflation of the 1970s, another 40 years later it should again be transformed in response to stagnation in the industrial world.

Maybe we can call it the Keynesian New Economics.

more private investment?

Jared Bernstein:

"Something is blocking the private sector investment channel and, as I note in the piece, many economic scholars are pondering this puzzle–Brad DeLong provides an excellent rundown of their thinking here."

JW Mason's first piece in The Baffler.

Farmer on helicopter drops

A Bridge Too Far? by Roger Farmer

Bernstein, Wren-Lewis and macro policy

Full employment: A bipartisan goal that’s missing from the candidates’ debates by Bernstein

There are two facts you should know about full employment. First, as the bars in the figure above show, since the late 1970s, we’ve been at full employment only 30 percent of the time (see the data note below for an explanation of how this is measured). For the three decades before that, the job market was at full employment 70 percent of the time.

Central bankers and their irrational fear by Simon Wren-Lewis

Continuum and possible futures

Continuum Actually Managed to Have a Pretty Sweet Ending by Charlie Jane Anders

The Dreamwork of Humanity by DeLong

In popular entertainment ... the Syfy TV series Continuum just ended on an upbeat note. 2077 will look more like Star Trek's one-world government, replicator communism and the Corporate Congress will never have existed thanks to the time-travelling fascist "Protector" Keira Cameron. In the Wachowski siblings' movie Jupiter Ascending, on the other hand, Capital has expanded across the universe, working through family "houses" of "entitled." Galaxies of planets haves succumbed to Piketty's death spiral as the .000000000001 percent utilize sentient beings as resources for profit as if they were Soylent Green or batteries for the Matrix's AIs. He who controls the populated planets, controls the universe.

As a revolt erupts among the central planners at the FOMC, more and more one hears about the possibility of "cold fusion" (see Willem Buiter and Citigroup's Steven Englander) or a "Peoples' QE" (Jeremy Corbyn). Simon Wren-Lewis described it as "democratic helicopter money." "Investment that also boosts the supply side is likely to be a far more effective form of stimulus than cheques posted to individuals."

Cold fusion raises the possibility of unprecedented leaps in "productivity" which would provide immense help in the campaigns to avoid global warming and the Piketty death spiral.

And yet it draw opposition from the likes of Nick Rowe and David Beckworth. Why?

Bernanke, Glasner, and long-term rates

Bernanke’s Continuing Confusion about How Monetary Policy Works by David Glasner

Over my four years of blogging — especially the first two – I have written a number of posts pointing out that the Fed’s articulated rationale for its quantitative easing – the one expressed in quote number 1 above: that quantitative easing would reduce long-term interest rates and stimulate the economy by promoting investment – was largely irrelevant, because the magnitude of the effect would be far too small to have any noticeable macroeconomic effect. 

In making this argument, Bernanke bought into one of the few propositions shared by both Keynes and the Austrians: that monetary policy is effective by operating on long-term interest rates, and that significant investments by business in plant and equipment are responsive to relatively small changes in long-term rates. Keynes, at any rate, had the good sense to realize that long-term investment in plant and equipment is not very responsive to changes in long-term interest rates – a view he had espoused in his Treatise on Money before emphasizing, in the General Theory, expectations about future prices and profitability as the key factor governing investment. Austrians, however, never gave up their theoretical preoccupation with the idea that the entire structural profile of a modern economy is dominated by small changes in the long-term rate of interest.

market monetarists criticize People's QE

The oil, gas, coal and nuclear industries want to prevent a cold fusion breakthrough!

Fiscal offset of silly QE by Nick Rowe

People's QE Has Been Tried Before and Failed by David Beckworth

Bernstein, Brainard, and Tarullo

Fed Fight! by Jared Bernstein

Kervick troll

Kervick:

"Yes, Krugman is a hack. These days, he's only about half a notch up from Politico. He hasn't had an interesting new idea since some time in the late 80's."

Lael Brainard and Duy

Economic Outlook and Monetary Policy by Lael Brainard

Brainard Drops A Policy Bomb by Tim Duy

Home Fires Theme Song

Trekonomics

“You see, money doesn’t exist in the 24th century” by Isabella Kominska

As any good Trekkie will tell you, the economics of the 24th century are somewhat different. Why? Because the acquisition of wealth is no longer the driving force in people’s lives. They — Ferengi excluded — work to better themselves and the rest of humanity.

Except, the bummer is, that’s probably a major over-simplification.

A post-scarcity economy — a.k.a. the economic reality of an abundant system — may not necessarily lead to a utopian world. At least if we go by the meritocratic example of the fictional Star Trek society.

In other words, here’s a post about how I attended a New York Comic Con panel on the economics of abundance — featuring Paul Krugman and Brad Delong, Annalee Newitz (i09), Chris Black (Enterprise writer), Felix Salmon and Manu Saadia, author of the new book Trekonomics — and learnt that even if we did have it all one day, chances are, highly-popular cosplaying events would still be capped by the natural limits of space-time.

Thus, while the acquisition of wealth might not drive people, the acquisition of access rights to highly prestigious events (a comic-con ticket commodity forward curve of its own, if you will) will continue to do so. And if not that, the more basic acquisition of connections to people who “know the right people who know the secret passwords that can sweet-talk you through the gate-keepers”. Plus ca change.

Yes. Sometimes it’s very good indeed to be an FT Alphaville reporter.

Here follows a truncated transcript from the panel, purposefully excluding our very ridiculous question to the panel about whether or not the Federal Reserve will have finally raised rates by the 24th century.

MANU: The project for the book, it started out drinking beer with Chris. We were discussing about whether there is a book about Star Trek economics because there is a book about everything to do with Star Trek.

In the book I’ve tried to step out of that mindset, and tried to actually describe how it works. And I’ve discovered some very surprising things.

The biggest thing, I believe, that I got out of researching the book and writing it, is that the post scarcity in Star Trek is not driven by technologybut a policy choice. And this is where having such a stellar economic panel to discuss this comes in.

FELIX: What is post scarcity?

BRAD: Well 400 years ago, in almost all human societies being rich relative to your neighbours mattered a lot. If you were poor, especially poor and female, chances were you weren’t getting the calories you needed to reliably ovulate, and chances were your children weren’t getting the nutrients that they needed for their immune systems to be protected against the common cold. 400 years ago the great bulk of humanity lived lives that were nasty, brutish, short and they were hungry pretty much all the time. And when they weren’t hungry they were wet, because the roof leaked, and when they weren’t wet they were probably cold because damp proofing hadn’t been invented.

Now we, here, in the prosperous middle class in the North Atlantic are moving into another society and Gene Roddenberry tried to paint our future by saying wait a minute what’s going to happen in three centuries? In three centuries we are going to have replicators. Anything material, gastronomic that we want indeed anything experiential with the holo-deck we we want we are going to have. What kinds of people will we be then and how will we live? And indeed, we are quite ahead on that transition already.

Whenever I go say, to the middle of the country, I find myself terrified because I’m rarely the fattest person in the room, which means right now in the United States what used to be the principle occupation of the human race — farming — we are down to 1 per cent of our labour force growing essential nutrients because time spent growing four-inch egg plants which are harvested isn’t really food that’s art, and we have about three times as many people in our medical and health support professions working to try and offset the effects of excessive calories. We are now rapidly approaching a post scarcity economy not just for food but if you go and look at containers coming in from China with respect to things physically made as well. And that’s one of the things Star Trek is about.

ANNALEE: One of things I find interesting about Star Trek is that it does try to imagine a post-scarcity economy with no money, people don’t work because they have to but because they want to, but there are all these hints that we get — especially in Star Trek the next generation, my favourite series — that there’s a lot of ways that the post scarcity economy is supported by other types of economies.

Economies that we might consider to be part of the past, and that’s why one of the most interesting episodes to think about is “measure of a man” from the second season of Next generation where the question comes up whether Data, our favourite android with a positronic brain, is actually his own person or is in fact property. And this is a question which comes up again in Voyager when the holographic doctor who is unquestionably an autonomous human being is also considered property and he writes basically the communist manifesto, and encourages all these other holograms which are being horribly oppressed and enslaved to have a revolution. And this is going on at the periphery of Star Trek all the time.

Any time you get off the Enterprise, the wonderful utopian Enterprise, which did in fact inspire me to become a Marxist as a student because I did believe “wow, we really could get to a world which was better than this one” – we are constantly being reminded that there may be other systems of labour, like slavery or things that are closer to wage-slavery, which are supporting this wonderful life that the Federation enjoys and which Picard and team enjoy on their really clean ship. So that’s one of the things about Star Trek is that it allows us to have that kind thought experiment of what would it be like if we did get past capitalism?

Or if we did have a system of capitalism which was more restrained by government and regulation — whatever the hell the Federation is, the government, UN — but at the same time, forced to recognise that there are these differences in what people have access to, and intense labour they perform and some of them are being treated like property. Some of them are chattel. So that’s always the good part of the thought experiment?

FELIX: Is that what the writers were thinking about? Or how did people come up with these interpretations.

CHRIS: Yes. Well. It’s funny. We didn’t think about a lot of that stuff consciously. And I worked on Enterprise, so it was at the end of the long-run of the franchise. That universe had been well established. To hear this conversation, to hear this book has been written so thoughtfully and profoundly is really gratifying. There were larger issues that came into play than people even consciously thought about. The practical reality of trying within the production schedule hours of network television a year, you were just always scrambling to get good entertaining scripts written in front of the camera. We were first and foremost trying to write what we thought were thoughtful exciting adventure stories for Captain Archer and the crew so we weren’t consciously thinking about how these characters were being motivated by the needs of a post scarcity economy. But because that universe had already been established, and we all wanted to be respectful of that universe, and grateful — we took the responsibility of keeping Gene’s vision intact and moving it forward. Very conscious of not violating those rules. The answer is no. But we were very conscious of keeping those characters in the world they were established.

FELIX: Does post-scarcity economics even make sense?

PAUL: I watched the original series and a bit of the next generation and then dropped off. I’m more of an Asimov guy, what can I say. But, the question is… do we accept the premise of a post-scarcity society? First of all there’s a long history of people saying, we’re much richer than our ancestors were and if you go just a little bit further you’ll get to the point where there won’t be any economic question, post scarcity. Keynes wrote an essay about that saying that if the world got as rich as it is right now there would no longer be money, and John K Galbraith wrote that in a new industrial state that the standard of living of the average American would be so high that it’s basically only propaganda that would make them want more, to which Robert Solow responded, well it doesn’t look that high to me but maybe those things look different from where Galbraith vacations.

So, in Star Trek they have a replicator that can make any thing you want. But it makes any thing you want. Even now, we spend only 30 per cent of our income on goods the rest is for services, and the replicators won’t help with that. We have fewer manufacturing workers but lots and lots of nurses, so. So that’s the point. We can imagine a world where all services are provided as well. We have robots or something to do the services. But in order to do the full range of stuff we want they have to be very intelligent things in which case aren’t those then people? So the actual issue is that a world where you have servitors of some kind who will give you everything you want is a world where it’s very hard to tell the difference between servitors and slaves. So I think there’s arguably a dark side to the abundance theory.

The other thing to say, there’s this great section where Picard lectures a man from the 21st century, saying we’ve moved to a world where people don’t seek money they seek reputation and honour. Well Brad and I live in the academic world, where pretty much that’s how it works….

FELIX: So the post-scarcity economy is not utopian, it’s actually not that pleasant this meritocracy of the Federation.

MANU: It’s horrible.

It’s not horrible horrible. But I always thought Star Trek looked like a weird cross between a faculty club and the Red Cross. It’s very humanitarian, but I know for a fact the professors here know what I’m talking about. The world of meritocracy and academia is extremely harsh and cut throat. You’re on top one day, but you’re always afraid and watching your back because someone else is going to come and unseat you. So what you see on the show, the next generation, is really the 1 per cent. Those who are the ultra achievers in that sense. You barely see the other side of it, the 99% who lead lives of comfort and abundance but not necessarily the most interesting. So it seems to me to be very harsh. I always thought that as a kid watching the Next Generation, I always identified very much with Wesley Crusher, because he lived in a world where he had to achieve and he had to become the person that the adults wanted him to become and he actually didn’t want to. That’s the part that’s hard. You’re driven to achieve but it’s not at all clear you will achieve. Which is the problem of a meritocratic world. It’s not all fun and games.

FELIX: It’s very hard for a meritocratic world to be utopian, so what about the 99% of people who live on earth, are they happy?

CHRIS: Are they happy? I don’t know. What we focused on was the adventures of the people on the ship. This doesn’t exactly answer your question, but in terms of the meritocracy of it all you are seeing people at the top of their game. This is the 1/1000th of the 1 per cent who get to go to out of space. That was the mandate of the show. The funny thing was that there was an inherent conflict in trying to write the show, you had a group of people — Star Fleet officers — and this was a mandate given to us — that these people have a singular purpose in mind, they get along and they don’t get into petty conflicts and arguments which immediately took the drama out of the show, meaning everything had to come from an external source. And you didn’t exactly want every threat every week and week out to be about some hostile greedy or malicious alien race. What you wanted the drama to come from within the ship, from conflict between these characters that didn’t always get along. If you look at the original series, Spock and McCoy didn’t get along at all. McCoy would sometimes say the most outrageous racist things to him. There was mutual respect and friendship at the end of the day, but there was also amazing conflict.

FELIX: Is there anything utopian about meritocracy? 2016 is not the only anniversary of Star Trek, but also the 500th anniversary of Utopia by Thomas Moore. Are we, as far from utopia today as we were 500 years ago? Or is it just this thing that there’s always going to be this conflict. Or is there something different now? Thanks to star trek there are policy choices which mean we can get through it?

BRAD: First let me put in a plug for hyper intellectualised prosperous academic meritocracies. My career nadir, when Larry Summers looked at me across the table at the Treasury in early 1995 and said how did you get what the demand for pesos would be after NAFTA so wrong Brad? The worst analysis I have ever conducted as an economist. That burns considerably less than watching your children starve to death. We are problem solving, puzzle solving, status seeking creatures, who fortunately very much like to get involved in gift exchange relationships with each other so that we can all hang together in a 7.2bn society.

So we will find puzzles to solve and we will find sources of stresses and conflict. But the sharp point of what we’re all afraid of is very different in a post scarcity society. The plutocracy of New York are more interested right now in who happens to have the best apartment with a better view of central park than in where the next meal is going to come from. That is a considerable gain. We will make our status differences important and powerful to us psychologically, but we should be able to move beyond that. As Adam Smith wrote, the interesting thing about humanity and the strivers is that the strivers work like dogs their entire life, so that when they are retired they can sit in the sun so and be happy and comfortable and they could have done that anyway in their 20s, and they would have got more fun out of it.

FELIX: Are we always going to be competing for positional goods? Or could a post-scarcity world change human psychology?

PAUL: I think. First of all. When listening to Brad I think of the old line about how fights in academia are so bitter because the stakes are so small. And when the stakes are small. Aside from ego there is nothing at all. And even that is always going to be a really restrictive universe. So even people who are engaged in ferocious status competition, these are the people that are going to be featured on a TV show because it’s interesting, but the 99.9 per cent of the Federation are people who are doing other things and what exactly — I’m not sure it makes good drama — but it’s kind of interesting to ask what exactly would they be doing? So where Picard explains what motivates us, that’s actually what motivates people like him. And there are very few people like him. So what is the rest of the civilised universe doing? They’re enjoying life and doing cosplay and things. But it would probably be an interesting thing.

BRAD: But even that would be a source of status. Have you seen the stuff Annalee has been posting?

ANNALEE: And I’m cosplaying as an economist right now.

One of the things that’s really interesting about what you were raising Paul with what happens with ordinary people is that there’s this really funny story about a timeline in Star Trek which is established in the next generation era, there is a whole different timeline, so what happens is that earth is plunged into a war and in the first episode of next generation Q torments the crew by saying we’re going to go back to the world of our future, which is a medieval world, ruled by religious creepozoids. It’s basically this cyclical view of history, where this highly industrial organisation has fallen back to a medieval state, they’re living in extreme poverty, there’ disease and famine, and then some white dude figures out how to build a rocket ship by the skin of his teeth, erupting out of this medieval world of scarcity. Not coming out of a hyper industrial society, and then the Vulcans arrive. So I am left wondering is whether what really happens to humans as we transition to this post scarcity world, that basically we are colonised by Vulcans. So really it’s not that humanity evolves, it’s basically we’re colonised.

BRAD: It’s not colonisation, we’re pets.

ANNALEE: That’s colonisation, buddy.

FELIX: I was colonised by my cat a long time ago.

MANU: I always took the more optimistic view that we are the Vulcans, or we have to become the Vulcans. If we are going to be colonised I’d rather be colonised by Vulcans anyway.

BRAD: Nimoy always said he played Spock not as a being without emotions but a being whose emotions were so terribly suppressed he could not give into them at all. So Vulcans were a civilisation that was desperately trying to figure out how to actually behave in a civilised manner.

CHRIS: I think the interesting thing about Spock was that he was only half Vulcan. You had the best of both worlds, this character in conflict. This sense of what humans wanted to be and what they were fighting against being. This character is not devoid of emotions but needs to keep them under control, needs to keep them in check.

FELIX: Is that utopian or not? This world where we have emotions but we are constantly trying to keep them tacked down and never showing them doesn’t sound very utopian to me.

CHRIS: Conflict is the source of drama, and Spock was always in conflict with himself.

PAUL: People have an amazing capacity to be unhappy. If you look at utopia the problem isn’t scarcity, it’s people.

ANALEE: The Iain M Banks culture novels are another example of a post-scarcity world driven by a lot of the same problems we see in Star Trek, where at the edges of these beautiful ships there’s slavery and imperialism and racism, and people are constantly struggling with those issues even thought they can transcend them at any time.

PAUL: Iain M Banks, the culture novels are amazing. Everyone should read them.

BRAD: Reuse your weapons first. Read Use of Weapons first. [edit.]

PAUL: All the novels are really concerned with the fringe of the fringe of the fringe. Special circumstances, which is that the one part of society which isn’t functioning like the rest. But it does do what Star Trek does, have someone who is recruited from outside who gets to wander around one of these ships and gets to see what life is like for ordinary people, which is, to have life without slavery, there are in fact these super-intelligent minds, who can basically supply all the needs for the organic guys by basically — it barely requires a finger nail’s worth of attention. They can give you everything you need without worrying about it. People do seem to be somewhat more balanced in that kind of environment than they probably would be in reality.

ANALEE: But also everyone’s a cyborg. They all have neural nets. They can restrain their emotions.

MANU: To understand Star Trek’s economics you need to go back to Asimov, because it’s very much very directly connected, not so much the Foundation part but the robot stories. In the sense that at least if you read the Robots of Dawn and the later novels, Asimov describes a society beyond earth where robots take care of everything and you have these people living on their gigantic estates, and are enjoying life and not doing much.

PAUL: And they’re completely neurotic screwed up people. The luxury and role of that situation.

BRAD: Those who are not maladjusted people become Star Trek officers and compete for status. Perhaps if you really want to be looking at what their lives are like we should be looking at regency romances. A previous culture of abundance where people find very important and interesting things for themselves to do. Even though there is no serious conflict in a regency romance world. If you want to you can say there are three spheres of regional conflict: fear of violent death, scarcity of resources and who is going to sleep with whom. But what you’ll find in a society of abundance, like in a regency novel about the aristocracy, is that who is going to sleep with whom becomes the focus of the plot. The secondary focus being a demonstration of human excellence via proper appreciation of fashion.

PAUL: It’s cosplay, just a slightly different version.

ANNALEE: But don’t you think it’s possible Brad that what most ordinary people are doing is living on [inaudible] after having been screwed over by the Kardashians and now the Federation is there screwing them over — or maybe that’s more what society is like?

BRAD: No, that’s no longer a society of abundance. That’s the world we have today, in which we have the upper middle class of America. In the 7.2bn lives 2bn of them lead lives which are frankly indistinguishable from those of our pre-industrial ancestors, and the other 4.5bn live lives that look to us like the standard of life people had in the 1970s and 1950s, 1920s and 1880s, but with all their TVs and smartphones they can see us. So I got off the plane today from Lima, Peru. A wonderful city, a wonderful culture, lots and lots of people — all of them working at least as hard as anyone in New York, only about 1/8th as rich. And we may be approaching material abundance in terms of manufactured goods, and calories and nutrients, but they are certainly still very far from that.

2008

The Courage to Act in 2008 by David Beckworth

The Man in the High Castle

The Man in the High Castle (TV series)

According to the NYTimes, Amazon is run like a fascist state. But they allow you view to the pilot free. The show will be available Nov. 20th.

Elementary - King of Pain

cold fusion - unconventional monetary policy

"There's no such thing as "out of ammo" by Scott Sumner

‘Cold Fusion’ Is Citi's Answer to Fading Central Bank Firepower by Simon Kennedy

...
The medicine may nevertheless need to be stronger than the traditional prescription. If the world economy enters a downdraft, Steven Englander, global head of G-10 FX strategy at Citigroup Inc., proposes a more revolutionary response, akin to the “helicopter money” once advocated by Milton Friedman. 

In what he calls “cold fusion,” politicians would cut taxes and boost spending. Central banks would then cover the resulting increase in borrowing by purchasing more bonds as part of a commitment to permanently expand their balance sheets. The easier fiscal policy would be covered by QE Infinity. 

“Politically it is difficult for central banks to outright endorse monetization of government debt, but faced with another slump and armed with ineffective policy tools, we expect that central banks will quickly give the wink and nod to fiscal measures,” Englander said in a report to clients last week. 

The upshot would be greater purchasing power would be injected straight into the economy, increasing activity and inflation. Long-term bond yields would rise, yet short-term yields adjusted for inflation would turn negative. 

Fiscal Expansion 

“Increasingly the absence of fiscal policy is viewed as one of the reasons for a less than satisfactory recovery,” said Englander. “With rates at zero, fiscal policy will be needed to offset any negative shock that hits global economies.” 

Michala Marcussen, head of global economics at Societe Generale SA in London, agrees. 

“In a risk scenario, we believe policy makers, faced with the abyss, would take the next step into unorthodox policy, namely fiscal expansion,” she said. “Clearly not the risk that bond markets have in mind.”

Anonymous troll

"As I wrote two years ago, the Fed will never raise rates."

Charles Evans

Thoughts on Leadership and Monetary Policy by Charles Evans

NGDP targeting in Japan and raising the inflation target

How Practical is Japan's New NGDP Target? by David Beckworth

Understanding the current Fed and the problems with ftnt 14 by Jared Bernstein

Yellen on Inflation Dynamics

Inflation Dynamics and Monetary Policy by Janet L. Yellen

Emmys and Game of Thrones

Game of Thrones won for Best Drama Series. Benioff and Weiss won for Best Drama Writing for "Mother's Mercy." Peter Dinklage won for best supporting actor. David Nutter won for Best Drama Directing for "Mother's Mercy."

Tatiana Maslany was nominated for Best Drama Actress but didn't win.  The Knick was nominated. Veep won a bunch also. Silicon Valley was nominated. Better Call Saul and Bob Odenkirk were nominated.

And Evan Rachel Wood and Olivia Wilde were on HBO's Dolly and Em, two of my favorites.

Corbyn and Krugman and rate rage

Here's the real problem with Jeremy Corbyn's wacky money-printing scheme by Ryan Cooper

I don't completely agree with him.

Krugman  and Rate Rage.

Rate Rage in 1932

Milton, Money, and Interest Rates

More On The Political Economy Of Permahawkery

Is QE good or bad for capital, for rentiers, whatever? No matter — it’s bad for bankers, because it leads to a compression of the net interest margin, the spread between deposit rates and lending rates. And that is why there’s so much agitation for rate hikes on the part of finance.

Rate Rage

The Rage of the Bankers

Dean Baker, Mason, DeLong, Krugman: bankers: evil or stupid

The Argument for Higher Interest Rates: Are the Bankers Evil or Stupid? by Dean Baker

I see my friends Paul Krugman and Brad DeLong are arguing over whether the pressure from the banking industry for the Fed to raise interest rates is the result of their calculation that higher interest rates would raise their profits or is it just ignorance of the way the economy works. Krugman argues the former and DeLong the latter. I would mostly agree with Krugman, but for a slightly different reason.

I don't see the clear link, claimed by Krugman, between higher Fed interest rates and higher net lending margins for banks (the difference between the interest rate they charge on loans and the interest rate they pay on deposits). Such a link may exist, but his data don't show it. On the other hand, I think it is still not hard to make a case for banks' self-interest in following a tight money policy.

An unexpected rise in the inflation rate is clearly harmful to banks' bottom line. This will lead to a rise in long-term interest rates and loss in the value of their outstanding debt. This is very bad news for them.

While we (the three of us) can agree that such a jump in inflation is highly unlikely in the current economic situation, it is not zero. Furthermore, a stronger economy increases this risk. If we assume that the banks care little about lower unemployment (they may not be bothered by lower unemployment, but high unemployment is not something they wake up every morning worrying about), then they are faced with a trade-off between a greater risk of something they really fear and something to which they are largely indifferent. It shouldn't be surprising that they want to the Fed to act to ensure the event they really fear (higher inflation) does not happen. Hence the push to raise interest rates.

I suspect also there is a strong desire to head off any idea that the government can shape the economy in important ways. There is enormous value for the rich to believe that they got where they are through their talent and hard work and that those facing difficult economic times lack these qualities. It makes for a much more troubling world view to suggest that tens of millions of people might be struggling because of bad fiscal policy from the government and inept monetary policy by the Fed.

Interest Rates and Bank Spreads by J.W. Mason

The Fed is powerless

Roger Farmer:

From January of 2007, through September of 2008, expected inflation fluctuated between two percent and three and a half percent. When Lehman Brothers declared bankruptcy in September 2008, expected inflation fell by nearly eight hundred basis points in the space of two months and by October of 2008 it reached a low of negative four and half percent.

Immediately following the Federal Reserve purchase of one point three trillion dollars of new securities, expected inflation went back up into positive territory.

JohnH, troll

JohnH:

"wage inflation and tight labor markets are a Keynesian mirage intended to support trickle down policy""

interest on excess reserves for banks and non-banks

The Fed’s Policy Mechanics Retool for a Rise in Interest Rates by Binyamin Appelbaum

Jeremy Corbyn wins Labour leadership election

With Jeremy Corbyn Elected as New Leader, Britain’s Labour Party Takes a Hard Left Turn

Jeremy Corbyn’s Victory and the Demise of New Labour by John Cassidy

Junip - Line of Fire / Elementary

I've been watching the Elementary binge on WGN America. Thanks DVR!

It's a compelling show. On a personal note I share many of Jonny Lee Miller's Sherlock's stringent and unconventional views on a variety of subjects. Corporations, banks and bankers are loathsome. Love is a scam. Marriage has outlived its purpose.

But my personality is more like Lucy Liu's Joan Watson. She's very smart too but more quiet and polite than Sherlock. Less alpha dog and yet drawn to Holmes's brilliance and eager to learn from him. She seems conventional but as Sherlock points out to her regularly, she's not really. Anyway I find their partnership entertaining TV.

In episode 19 of season 2, a doctor who taught Watson plays one of my favorite Clash tunes Rudie Can't Fail.

Richard Muphy, Corbynomics and People's QE

I have added Richard (not Robert) Murphy's blog to my list.

Corbynomics 4 weeks on:

So, what of the most contentious one, People’s Quantitative Easing? Let’s break this down. For ease I will use The Economist again, but will refer to the many others who have made similar points.

First, the debate on investment has been welcomed, from the Economist, to the FT, to the Guardian and in the blogosphere: indeed, one of the criticisms is I have not made it strongly enough. As the Economist says:

As a percentage of GDP, Britain’s government investment is the seventh-lowest of 26 countries tracked by Eurostat (though it is higher than in some big economies, like Germany) and lower now than during the financial crisis.

The first success of this policy has been to put this issue back into debate.

Second, the idea of a National Investment Bank has been pretty widely welcomed. The Economist said:

To increase investment he wants to set up a “national investment bank”, which would, under government direction, spend on roads, houses and green energy. Nothing wrong with that.

Many agreed.

Third, the argument on Bank of England independence has been shown to be a red-herring. All QE has been Treasury approved: the idea that the BoE had operational control of this policy cannot be supported by any evidence. 

Fourth, it has been agreed, by Chris Giles in the FT and Larry Elliott in the Guardian for example, that PQE would have made sense in 2012 when stimulus was needed. In other words, PQE could have directed funds to the real economy more effectively then than actually happened at that time. Their argument is that PQE is, however, no longer relevant because we were now growing and they assume that will continue to be the case. Technically, the case was won at that point: the argument that PQE might work was over when it was conceded it was all down to timing.

Fifth, the argument that it is not legal has lost all head wind: it’s been effectively authorised in the UK and my design is Article 123 of the EU compliant. I have made clear I would expect some of the bond sales from the NIB, at least, to be held by the public, especially by pension saving institutions.

Sixth, some technical arguments on cost have been resolved: it is agreed that PQE would create new central bank reserves on which it has been conventional to pay bank rate interest, but as Adair Turner ha argued, that is just convention: there is no need to do so. Funding via PQE will then be cheaper than bond funding of the same investment and this matters when a significant part of UK gilts are owned overseas.

Seventh, the inflation argument got silly. The Telegraph turned up with the Zimbabwe argument, on cue. The fact that PQE is either clearly intended to stop if there is a risk of inflation because full employment is achieved, or would be countered (in that case only) by tax was not noticed by them. That’s just indication of the poverty of their thinking. There is no serious argument on this point: PQE is another tool in the armoury to create inflation when we do not have it, and need it.

Eighth, along came China. A week after I told the FT that another recession was likely and tools to deal with it would be needed China tried to deliver one. Now, of course, we have no clue what will happen as yet on that front, but markets are down and will stay down in my view, whilst people are very worried about what will happen if the Fed and BoE are daft enough to raise rates. Whether or not they do the risk of long term export of both recession and deflation from China itself via the emerging markets looks very real indeed. In other words, the need for a new fiscal tool when all monetary options have now failed became very starkly apparent and the prescient adoption of PQE by Jeremy Corbyn began to look like a good move: even the Telegraph seemed to note that.

Ninth, Mark Carney admitted monetary policy is near enough dead yesterday. He has said real interest rates of more than 1% (that means 1% over inflation) look unlikely for a long time to come. Thirty years ago real rates could be vastly higher: they have fallen 4.5% in real terms over that period, he says. The impact is significant. He is effectively saying that the room to manage the economy using interest rates has largely disappeared. With QE also largely discredited for creating asset price hikes, fiscal policy is now the only game in town. PQE is fiscal policy, but of course not the only fiscal policy. That is why it may well be important. What else is anyone going to use when the next crisis comes when no one else has suggested anything new: they just declare the cupboard bare?

Tenth, discussion of modern monetary theory has increased as a result, and that has clearly upset those dedicated to bond financing and / or central bank control of monetary policy. This is not an academic debate: it is about whether or not unelected people and bond markets control the choices governments make. PQE is not just a technical issue: it is about making clear who is in control, and I am emphatic it must be politicians accountable to parliament who are. PQE is intended to achieve that goal. No wonder that this has become a key point of contention. This is not about economics at all, per se: it is about the politics of power and in whose interests the economy is run. Difference here is not an issue of right or wrong: it is about belief. Many have not spotted this: I make it explicit.

And last, not everyone agrees on this issue. But haven’t you heard the one about asking two economists for an opinion and you will get three answers?

So, to summarise on PQE I suggest we’ve got somewhere near the following position:

1) Austerity can be opposed and PQE has fuelled that debate.

2) Investment is widely acknowledged to be needed. PQE delivers it.

3) A National Investment Bank is needed: PQE can help fund it

4) Private investors should not be excluded from these ideas: my suggestions on linking the NIB to pension saving as well as PQE should ensure that is possible. It also means the legality question goes away.

5) Questions of Bank of England independence have been raised but those doing so are going to have a much tougher time defending their case in future

6) Whether PQE is a policy only for recession is to be resolved: I certainly think it may have more use in that scenario but stress I do not think the state fills in the gaps left by the private sector. Sometimes it has to meet need and the curtail the private sector at the same time if social priorities are to be met. PQE and higher taxes can achieve that goal simultaneously. Those making the timing argument ignore this altogether and that is their mistake in my opinion.

7) The cost issue remains out there, although I am not sure why.

8) The bond preference issue is interesting, but is most often (but not always) used by those who have opposed their use for deficit funding, and so is in too many cases disingenuous. It also ignores the cost issue and the leakage out of the UK economy whilst still supporting the view that we are constrained by bond markets. We are not, and PQE indicates that fact. I fully admit that part of PQE is about changing narratives and power relationships and think that important.

I stress: I hope it is clear that I am listening and I do note the points made. But I also think PQE is still, very firmly, on the agenda after all that. It will change (it has already in some ways) but I can’t see it going away.

No doubt omissions will be pointed out. But please keep to the arguments: I am bored by the rest.

- See more at: http://www.taxresearch.org.uk/Blog/2015/08/30/corbynomics-four-weeks-on/#sthash.DG3hHVy3.dpuf

L + R = J + M

New Game Of Thrones fan theory adds an “M” to “R+L=J” by AV Club

Stannis is alive in the books.

via Salon:

While we never exactly saw Stannis Baratheon die on the show, we did see him get a sword to the head courtesy of Brienne of Tarth before the camera cut away, making it seem pretty clear that the disgraced Lord of Dragonstone was well on his way to a rendezvous with the Many Faced God. As episode director David Nutter said at Comic-Con, “From the beginning, and [through] the script process, that was the intent — he’s dead.”

But according to George R. R Martin, Stannis is alive and well — at least in the books. At the end of “A Dance With Dragons”, Ramsay Bolton sends a letter to Jon Snow saying he has killed Stannis, even though we never witness the actual death take place. But addressing a fan on his LiveJournal who asked whether Stannis was alive or dead, Martin responded definitively: “In my books? Alive beyond a doubt.”

Of course, the books and the show often diverge (remember the whole Lady Stoneheart debacle?) so it’s possible that Stannis is alive in the books and dead in the show. Or it is possible that Stannis somehow survived Brienne’s sword and he has a part to play in the great (onscreen) battle of ice and fire to come. But most importantly, it leaves open the option that Book-Stannis could be redeemed as a character — which would be a nice consolation prize for the fans still reeling from TV-Stannis’ arc at the end of last season.

Chris Giles is the worst, or how to be a bootlicker for the rich and powerful special interests

I'll never subscribe to the FT.

How to be hard left without being stupid by Chris Giles

There is no left-right dividing line in sensible economic policymaking. Everyone needs to define their ambitions, understand how policy might achieve goals and recognise constraints. Mr Corbyn’s ambition is clear: he wants a more equal and a more prosperous society. 

Since this desire is shared across the political spectrum, the radical left must demonstrate its ability to act where other, more conservative forces, are constrained.

Not true. There is a left-right divide and that desire is not shared. They may say that, but their actions belie what they say.

All of this is economically literate, radical and left wing. Little of this is Corbynomics. For him, there are vast untapped pools of free money, to be accessed via setting up a national investment bank, attacking so-called “corporate welfare”, engaging in quantitative easing “for the people” or simply ending austerity.

Again, not true. This is the guy who attacked Piketty in a vague fashion.

Lisa Belkin on the Yonkers Housing Crisis

The Painful Lessons of the Yonkers Housing Crisis by Lisa Belkin

Crime has not increased. Property values have not decreased. Life is pretty much the same for those who lived on these blocks before the townhouses were built. And for those who moved in from the projects? The change of address didn’t solve all their problems, but it did make their lives safer, cleaner and measurably better.

Last month, the Obama administration announced that it would put teeth behind a policy making federal housing funds conditional on a city’s demonstrated efforts to reduce housing segregation. It won’t be easy. 

Already in Westchester County, not far north of Yonkers, local politicians are sounding exactly like those here in the 1980s. Ordered to build 750 units of affordable housing in 31 of its wealthiest, whitest towns, Westchester’s county executive, Rob Astorino, staged a photo op at Hillary Clinton’s front gate in Chappaqua, warning: “This is happening right here in Westchester County, and if you live in Ohio, if you live in Florida, if you live in Maine — wherever you live in the United States — you are next.” 

But if there is a new commitment from the federal government, and the longstanding but deeply frayed rules are actually (and finally) enforced, then perhaps the legacy of Yonkers can be more than Pyrrhic. Maybe we’re a few steps further along than we thought.

The Men in Blazers with David Simon

The Men in Blazers Show: David Simon Interview

I've been getting into Premier League Football/Soccer via NBCSN and USA. These guys had a funny interview with David Simon who was promoting Show Me A Hero.

safe assets and the natural rate

My Quiz for Wannabe Keynesians by Roger Farmer

A Tale of Two Natural Rates by Roger Farmer

Farmer disagrees with Krugman who agrees with Williamson.

The Natural Rate Hypothesis: an ideapast its sell-by date by Roger Farmer

Why financial markets are inefficient by Roger Farmer


Wow Farmer predicts a Great Depression. A little alarmist.

German wage repression

German Wage Repression: Getting to the Roots of the Eurozone Crisis By John Miller

Germany has been insistent that the so-called peripheral countries increase their competitiveness through slower wages rises or even wage cuts. Wage increases in Germany are an equally important, and symmetrical, part of this necessary adjustment process. The wage increases are steps in the right direction, but relatively small steps. More gains for German workers in the future would be both warranted and a win-win proposition for Germany and its trade partners. — Ben Bernanke, “German wage hikes: A small step in the right direction,” Brookings Institution, April 13, 2015.

Ben Bernanke not only supports recent German wage increases, he also thinks further wage increases for German workers are “warranted and a win-win proposition for Germany and its trade partners”?

Now that’s a jaw-dropper. Has the former head of the Federal Reserve Board—the guardian of “price stability,” which makes policy designed to keep U.S. wages in check—switched sides in the class war, now that he is retired?

Hardly. Rather, it’s that catering to the demands of German high finance and other elites has been so disastrous that even the former chair of the Fed cannot deny the undeniable: unless Germany changes course and boosts workers’ wages, the euro crisis will only worsen.

Let’s look more closely at just how German wage repression and currency manipulation pushed the eurozone into crisis, ignited a conflict between northern and southern eurozone countries (with Germany as the enforcer of austerity), and left Greece teetering on the edge of collapse.

From “Sick Man” to Export Bully

In 2000, Germany was widely considered “the sick man of Europe.” Through much of the previous decade, the German economy had grown more slowly than the European Union average, its manufacturing base had shrunk, and its unemployment rate had risen to near double-digit levels. Nor was Germany an export powerhouse, with its current account (the mostly widely used and most comprehensive measure of a nation’s financial balance with the rest of the world) showing a modest deficit in 2000.

Adopting the euro as its sole currency, in January 2002, was no panacea. For the next two years, Germany’s economy continued to stagnate. But converting to the euro—whose value was more or less an average of that of the stronger and weaker former currencies of the member countries—soon did improve Germany’s competitive position internationally. German exports, no longer valued in strong deutschmarks, but in weaker euros, became cheaper to buyers in other countries. At the same time, the exports of countries that used to have weaker currencies, such as the Greek drachma and the Spanish peseta, became more expensive. That alone transformed Germany’s current account deficit into a surplus.

China is widely accused of “currency manipulation,” keeping the renminbi weak to boost its exports. But few see that the eurozone—the now 19- country bloc sharing the euro as its common currency—has functioned for Germany as a built-in currency manipulation system. And much like China, Germany used a lethal combination of wage repression and an undervalued currency to boost its exports and output at the expense of its trading partners.

Following the adoption of the euro, Germany instituted a set of “labormarket flexibility” policies intended to further improve its international competitiveness. Known as the “Agenda 2010 Reforms,” the new policies reduced pensions, cut medical benefits, and slashed the duration of unemployment benefits from nearly three years to just one. They made it easier to fire workers, while encouraging the creation of parttime and short-term jobs. The Organisation for Economic Co-operation and Development (OECD) reports that, from the mid-1990s to 2008, the incomes of the poorest 30% of Germans actually declined in real (inflation-adjusted) terms. Germany’s repressive labor policies kept a lid on wage growth. In every year from 2000 through the onset of the financial crisis in 2009, German compensation per employee increased more slowly than the eurozone average, and less even than in the United States.

During the 1990s, German workers’ real (inflation-adjusted) wages rose along with productivity gains, meaning that employers could pay the higher wages without facing higher labor costs per unit of output. After 1999, wage gains no longer kept pace with productivity, and the gap between the two widened. As wages stagnated, inequality worsened, and poverty rates rose. Total labor compensation (wages and benefits) fell from 61% of GDP in 2001 to just 55% of GDP in 2007, its lowest level in five decades.

German wage repression went even further than necessary to meet the 2% inflation target mandated by the eurozone agreement, and insisted upon by German policymakers. Unit labor cost (workers’ compensation per unit of output) is perhaps the most important determinant of prices and competitiveness. Unit labor cost rises with wage increases but falls with gains in productivity. From 1999 to 2013, German unit labor cost increased by just 0.4% a year. The reason was not German productivity growth, which was no greater than the eurozone average over the period; rather, it was that German labor-market policies kept wage growth in check.

This combination of a built-in system of currency manipulation afforded by the euro and labor-market policies holding labor costs in check turned Germany into the world’s preeminent trade-surplus country. As its competitive advantage grew, its exports soared. Germany’s current account surplus became the largest in the world relative to the size of its economy, reaching 7.6% of the country’s GDP, more than twice the size of China’s surplus compared to its GDP.

Beggar Thy Neighborhood

Germany’s transformation into an export powerhouse came at the expense of the southern eurozone economies. Despite posting productivity gains that were equal or almost equal to Germany’s, Greece, Portugal, Spain, and Italy saw their labor costs per unit of output—and in turn prices rise— considerably faster than Germany’s. Wage growth in these countries exceeded productivity growth, and the resulting higher unit labor costs pushed prices up by more than the eurozone’s low 2% annual inflation target (though by only a small margin).

The widening gap in unit labor costs gave Germany a tremendous competitive advantage and left the southern eurozone economies at a tremendous disadvantage. Germany amassed its ever-larger current account surplus, while the southern eurozone economies were saddled with worsening deficits. Later in the decade, the Greek, Portuguese, and Spanish current account deficits approached or even reached alarming double-digit levels, relative to the sizes of their economies.

In this way, German wage repression is an essential component of the euro crisis. Heiner Flassbeck, the German economist and longtime critic of wage repression, and Costas Lapavistas, the Greek economist best known for his work on financialization, put it best in their recent book Against the Troika: Crisis and Austerity in the Eurozone: “Germany has operated a policy of ‘beggar-thy-neighbor’ but only after ‘beggaring its own people’ by essentially freezing wages. This is the secret of German success during the last fifteen years.”

While Germany’s huge exports across Europe and elsewhere created German jobs and lowered the country’s unemployment rate, the German economy never grew robustly. Wage repression subsidized exports, but it sapped domestic spending. And, held back by this chronic lack of domestic demand, Germany’s economic growth was far from impressive, before or after the Great Recession. From 2002 to 2008, the German economy grew more slowly than the eurozone average, and over the last five years has failed to match even the sluggish growth rates posted by the U.S. economic recovery. With low wage growth, consumption stagnated. German corporations hoarded their profits and private investment relative to GDP fell almost continuously from 2000 on. The same was true for German public investment, held back by the eurozone budgetary constraints.

At the same time, Germany spread instability. Germany’s reliance on foreign demand for its exports drained spending from elsewhere in the eurozone and slowed growth in those countries. That, in turn, made it less likely that German banks and elites would recover their loans and investments in southern Europe.

Wage Repression and the Crisis

No wonder Bernanke now describes higher German wages as an important step toward reducing Europe’s trade imbalances. More spending by German workers on domestic goods and imports would help Germany and its trading partners grow, and improve the lot of working people throughout the eurozone.

Of course, much more needs to be done. Putting an end to the austerity measures imposed on Greece and the other struggling eurozone economies would boost their demand as well. In fact, it would also better serve the interests of Germany and the profit-making class, by helping to stabilize a system from which they have benefited so greatly at the expense of much of the region’s population.

Still, raising the wages of German workers to match productivity gains is, as Bernanke recognizes, surely a step in the right direction. Raising U.S. wages to match productivity gains would help defuse U.S. wage repression and boost economic growth here as well. If Bernanke throws his weight behind that proposition, we’ll truly wonder which side is he on.

Sources:  Kaja Bonesmo Fredrikson, “Income Inequality in the European Union,” OECD Economic Department Working Papers, No. 952, April 16, 2012; Brian Blackstone, “Germany’s Rising Wages Bode Well for Global Economy,” Wall Street Journal, April 12, 2015; Heiner Flassbeck and Costas Lapavistas, Against the Troika: Crisis and Austerity in the Eurozone(Verso, 2015); Real News Network, Interview with Heiner Flassbeck: “Germany’s Collective Denial,”  Feb. 22, 2015; Ben Bernanke, “Greece and Europe: Is Europe Holding up its end of the Bargain?” Ben Bernanke’s Blog, July 17, 2015; Philippe Legrain, “Germany’s Economic Mirage,” Project Syndicate, Sept. 23, 2014.

John Miller is a professor of economics at Wheaton College and a member of the Dollars & Sense collective.