inflationphobia

How the interest rate increase of 2015 caused the Great Recession by Scott Sumner

via Andy Harless

Fed Fail Part XXIV (or opportunistic disinflation)

63 to 58 percent of the civilian population.

The Fed hasn't devalued too much so creditors retain the value of their claims. Deleveraging is done on the backs of the poor and working class, not split fairly between creditors and debtors.

Employers get a more pliant workforce with high unemployment and employees afraid to lose their jobs. However there has been downward nominal wage rigidity which probably has helped keep deflation at bay.

But news articles often report that people are taking new jobs at much lower pay levels.

sums up the Republican Party of the 21st Century

commenter Joe Smith at DeLong's Grasping Reality with Both Invisible Hands: Fair, Balanced, and Reality-Based: A Semi-Daily Journal post on Yglesias on Paul Ryan:

MATTHEW YGLESIAS (2010): WHY WE SHOULD FEAR THAT PAUL RYAN TALKS TO JOHN COCHRANE…

Matthew Yglesias (2010):

Paul Ryan's Monetary Economics: Paul Ryan says that “monetary policy was always my first love” but he doesn’t seem to know very much about it: “There is nothing more insidious that a government can do to its people than to debase its currency,” Ryan said. Just as harmful, Ryan warns, is that the proliferation of newly printed dollars inevitably unleashes inflation and throws the economy out of kilter in other ways. “Inflation is a killer of wealth. It wipes out the middle class. It eviscerates the standard of living for people who have retired or are living on fixed incomes,” he said. “Name me a nation in history that has prospered by devaluing its currency.” [...]

So to sum up, right now inflation is running lower than it was in the 1990s and 2000s. What’s more, in the 1990s and 2000s it was running lower than it was in the 1980s. And what the Fed is trying to do is to bring inflation back not to the levels of the Ronald Reagan Era, but to the rate we enjoyed in the 1990s and 2000s. Maybe Ryan’s a madman rather than a hypocrite…

Joe Smith said... "Ryan was sharing $350.00 bottles of wine with Cochrane and a hedge fund manager."

Forget Paul Ryan's Budget: His Scariest Idea Is About the Federal Reserve by Matthew O'Brien

Heartless Bastards announces tour dates and provide tracks off new album. Tickets go on sale this weekend.

via Krugman, Jean-Claude Trichet, June 2010:

One cut after another: many economists say that there is a clear risk of deflation. What are your views on this?

“I don’t think that such risks could materialise. On the contrary, inflation expectations are remarkably well anchored in line with our definition – less than 2%, close to 2% – and have remained so during the recent crisis. As regards the economy, the idea that austerity measures could trigger stagnation is incorrect.”

Incorrect?

“Yes. In fact, in these circumstances, everything that helps to increase the confidence of households, firms and investors in the sustainability of public finances is good for the consolidation of growth and job creation. I firmly believe that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

How Does the Economy Choose Which Equilibrium to Settle at?: Praying for the Confidence Fairy to Rescue Italy Edition by DeLong

Martin Feldstein claims that Italy does not need anybody else's help:

"I put the bastards of the world on notice that I do not have their best interests at heart."

The Rum Diary: a literary equivalent of a superhero origin story

Arsenal of Democracy

Dean Baker points us to an editorial at the Washington Post.

Nor is Mr. Obama or his economic policy to blame for the economy's inability so far to resume robust, job-generating growth. The economy faces a painful, protracted process of deleveraging. Households and companies must work off a huge overhang of debt built up during the boom, and they can't resume spending and investing in the meantime. That deleveraging will hamper growth for -- well, for as long as it takes. Government efforts may ease deleveraging, but to the extent they succeed, it is generally by postponing the day of reckoning and making it more expensive when it inevitably arrives. 

Baker also notes that those calling for sacrifice failed to foresee the $8 trillion housing bubble which caused the overleveraging of debt. As Krugman argues, we can work off the debt cleanly or ugly. In the meantime the government could boost aggregate demand to utilize excess capacity until the private sector recovers. 

Here Krugman blogs about a new paper which shows that fiscal stimulus worked during the prewar buildup to World War II.

What Gordon and Krenn point out is that we actually have more information than a simple comparison between the depressed peacetime economy and the war economy after Pearl Harbor: there was a period of more than two years when the United States was gearing up for war but not yet engaged in combat -- the Arsenal of Democracy era. Rationing was not yet in effect, and for at least part of this period the economy still had excess capacity despite a very large rise in government spending.

...in the prewar buildup you had a clear-cut expansion of federal spending on the order of 14 percent of GDP. That’s a real experiment with the economy. And the results were clearly Keynesian.

The editors at the Post seems to the think the stimulus bill worked to help prevent another Great Depression - actually it was negated by the "50 little Hoovers" at the state level - but they don't advocate more to get us to full employment and full capacity usage.

It seems to the editors at the Post were a little too complacent about the housing bubble and are currently too complacent about high unemployment, slow growth and disinflation.

Interesting bit from a commenter at Baker's blog:

From Keynes's The General Theory of Employment, Interest, and Money: Chapter 21 - Trade Cycle - Section III:

"Furthermore, even if we were to suppose that contemporary booms are apt to be associated with a momentary condition of full investment or over-investment in the strict sense, it would still be absurd to regard a higher rate of interest as the appropriate remedy. For in this event the case of those who attribute the disease to under-consumption would be wholly established. The remedy would lie in various measures designed to increase the propensity to consume by the redistribution of incomes or otherwise; so that a given level of employment would require a smaller volume of current investment to support it."

Skills Mishmash

There are two competing memes or narratives about the slump's low levels of employment. As Mike Konczal at Rortybomb blogs (via Krugman), "The first is a story of aggregate demand. The second theory is one of a mismatch in skills."

Dean Baker blogs:

Actually, the statistics do not show that the number of job openings is anywhere close to the number of unemployed workers. The most recent data show the number of openings at just over 3 million, a bit more than 1 opening for every 5 unemployed workers. This is still down by more than one-third from pre-recession levels.

It is also worth noting that we don't see evidence of the other factors that would be consistent with growing structural unemployment. This mismatch story would imply that there are sectors of the economy in which wages are rising rapidly and average hours per worker are increasing, as employers increase hours due to their inability to find qualified workers. There is no major sector of the economy that fits this description.

Commenting on Konczal, Krugman blogs:

So how would you decide between these theories? The answer is to look at the evidence -- specifically, to ask whether what we see bears the "signature" of one story or the other. The aggregate demand story suggests that we should see depressed employment in all industries, that we should see workers of every skill type facing a poor job market. The mishmash mismatch story says that we should see surpluses of labor in some places, but shortages in others.

And Mike shows that the data overwhelmingly fit the demand story, not the mismatch story; Every single major industry has seen a rise in involuntary part-time work; so has every major occupation. There’s no hint that any major kind of labor, in any sector, is in short supply.
...
The evidence, then, is overwhelmingly in favor of a demand story. But the mismatch people don’t want to hear that -- and they have substantial influence. And so the slump goes on.

"Fiscal Gridlock"

Baker was commenting on a New York Times story by Sewell Chan which gave space to Minnesota Fed President Kocherlakota, a leading proponent of the skills mismatch argument. Chan reports he said:

"We are unabashed technocrats, seeking to solve an unabashedly technical problem: how do we manage monetary policy so as to ensure lower unemployment and maintain inflation at an appropriate rate?" he said. Disagreements, he added, "ultimately stem from different assessments of the complicated economic situation and not from political differences"

I disagree with Kocherlakota. It's very political.* Elsewhere in the article Chan writes:

Although the Fed considers that danger [of deflation] remote, it is worried because inflation is running at only about half the desired level of about 2 percent, while unemployment stands at 9.6 percent. 

The committee’s Aug. 10 meeting was dominated by a vigorous discussion over the decision to reinvest the mortgage-related bond proceeds -- an approach Mr. Bernanke favored. The meeting on Tuesday will probably be used to assess actions the committee might take at its meetings on Nov. 2 and 3 and Dec. 14. 

...

Continued "fiscal gridlock" -- an inability to reach agreement on how to handle the impending expiration of the Bush-era tax cuts -- would put pressure on the Fed to act, Mr. Berner added. A second round of quantitative easing could lower the yield on the benchmark 10-year Treasury note to 2 percent, from its current level of about 2.75 percent, he estimated.

Laurence H. Meyer, an economic forecaster and former Fed governor, said additional quantitative easing would have a meaningful effect on the economy but would not be a "game changer." 

The Fed could announce that it was buying an additional $2 trillion in securities -- nearly doubling its $2.3 trillion balance sheet, which is already two and a half times where it stood before the financial crisis in 2008. Or it could take a more incremental approach, by buying a modest amount of securities and leaving the door open for more. 

Mr. Meyer estimated that the "shock-and-awe option" would raise economic growth 0.3 percentage point in 2011 and 0.4 percentage point in 2012, but that unemployment would remain high: 9.2 percent at the end of 2011 and 7.7 percent by the end of 2012. 

...

"For me, the ball is in the fiscal court for now," Mr. Fisher [President of Dallas Fed] said. "Any further action by the Fed must be subject to the kind of rigorous cost-benefit analysis that Ben Bernanke cited in Jackson Hole."

The fiscal court ain't doing nothing. There's "fiscal gridlock." It's not the Fed's fault, but it's the case. So, Mr. Fisher is in fact making a political argument. We shouldn't do anything about the low employment levels caused by the bursting of the housing bubble. We should allow the American middle class to be destroyed. Because why? Fisher doesn't say but it's most certainly a political decision and not a technical one.  The economic evidence is there on what needs to be done. Inflation is at one percent and 9 percent unemployment through 2011? Does Fisher really know what the costs of that is?

Perhaps the political legitimacy of the Fed?
--------------------------
* A good rule of thumb: if the argument relies on accurate data, it's technical. If it ignores all evidence and data: it's political.

Let Them East Cake
(Or the Heartless Bastards)

Why I don't like Tyler Cowen:

Although the unemployed might prefer such a policy [of higher inflation and full employment], they are not well-mobilized politically. And President Obama is himself politically weak at the moment, so he cannot offer the Fed much cover.

The dubious assertion about Obama aside, full employment should be preferred by most voters in the country. Economists should know why. The only people who don't want full employment are those who prefer labor to have a weak bargaining position and prefer an increase in inequality and all that entails. Voters who don't have full employment as a priority are essentially saying they don't want a middle class. They want America to become a banana republic, with a tiny, greedy, corrupt elite and a mass of the desperate, working poor.

(A "New Beginning" indeed)

War on Poverty Over: Poverty Won.

Financial Times reports  "US workers’ poverty reaches 50-year high."

Poverty among the working-age population of the US rose to the highest level for almost 50 years in 2009, as the human cost of the deepest economic downturn since the Great Depression was laid bare in new census data.

Poverty among those aged 18 to 64 rose by 1.3 percentage points to 12.9 per cent -- the highest level since the early 1960s, prior to then-president Lyndon Johnson’s "War on Poverty. The overall poverty rate rose by 1.1 percentage points to 14.3 per cent, the highest since 1994.

Whereas the New York Times reported a 15-year high? According to Census data? Note the difference in the links.

Again you have to wonder about the efficacy of Bill Clinton's triangulating "welfare reform." Three members of his administration resigned over the signing of the "Personal Responsibility and Work Opportunity Act."

It was part of the reason I was for Nader against Gore and for Obama against Hillary, even if Obama has said welfare "reform" was a good thing.

Update: The Financial Times reports poverty "among those aged 18 to 64" is at a 50-year high. They don't say it, but much-maligned Social Security seems to have blunted poverty amongst those over 64, something the Catfood Commission intends to remedy.

Take Your Pick of the Data

The IMF forecasts 9.5 percent unemployment for this year and 2011.

The Federal Reserve Bank forecasts 9.5 percent unemployment for this year, 8.7 percent for 2011 and 7.5 percent for 2012.

The White House's Office of Management and Budget predicts 9.5 percent this year and 9 percent in 2011. The jobless rate is expected to drop to 8.1 percent in 2012.

The White House’s Office of Management and Budget projected that the deficit for the fiscal year ending Sept. 30 would be $1.47 trillion, $84 billion lower than it estimated in February but still a record in dollar terms. Much of the reduction stemmed from lower than anticipated outlays for unemployment insurance. 

Thanks to the filibustering Republicans I would guess. (What heartless bastards.*)

Joe Nocera writes about FICO scores and the big three credit bureaus.

They gather input about the prospective borrower’s lending history from various lenders like credit card companies and auto dealers, plug them into a formula and derive a credit score.

You would think, given the critical importance of an accurate score, that there would be rules about the information that is submitted to them. There aren’t. Lenders can submit information about your credit history to one of the bureaus, all of them or none of them. Some of them turn over information right away; some take months; some don’t do it at all. Some are sticklers for accuracy; others are sloppy. The point is that the credit score is derived after an information-gathering process that is anything but rigorous.

Or, rather, I should say, the three different numbers that are derived. Almost always there is a difference -- sometimes a big difference -- in the credit scores generated by the three bureaus.

...

But what I find incredible is that we have imbued credit scores with these magical predictive powers -- and yet the companies coming up with the scores can’t even get the borrower’s address and employer right. It would be funny if it didn’t matter so much.

This was the week, of course, that President Obama signed the financial reform bill into law, which calls for the establishment of a new consumer financial protection agency. The credit scoring business would certainly seem to be a worthy area for the new agency to dive into.

Wouldn’t you agree, Professor Warren?

Oh no he didn't!
----------------
*I have tickets to see the Heartless Bastards play at the Bottom Lounge tonight.

"A Missing Macroeconomic Playbook?" by Brad DeLong

John Stuart Mill was thus explicitly refuting the older French economist Jean-Baptiste Say. Say had been well-embarked on a career in politics and government in the new French Republic of the early 1790s: special assistant to Gironde Party Secretary of the Treasury Clavier. But then Clavier fell: purged, arrested, imprisoned, and executed by Robespierre's "Mountain" faction. Somehow Say escaped the wreck with not just his life but his liberty and some property as well, and set out to pursue happiness by withdrawing from politics to write treatises on economic theory. In 1821 Say published his Letters to Mr. Malthus, in which he argued that the very idea of a "general glut" was self-contradictory, for the very fact that commodities had been produced meant that there was sufficient demand in aggregate to buy them:

(via Yglesias)

From Wikipedia:

The Mountain (French: La Montagne) refers in the context of the history of the French Revolution to a political group, whose members, called Montagnards, sat on the highest benches in the Assembly. The term, which was first used during the session of the Legislative Assembly, did not come into general use until 1793.

At the opening of the National Convention the Montagnard group comprised men of very diverse shades of opinion, and such cohesion as it subsequently acquired was due rather to the opposition of its leaders to the Girondist leaders than to any fundamental hostility between the two groups. The chief point of distinction was that the Girondists were mainly theorists and thinkers, whereas the Mountain consisted almost entirely of uncompromising men of action.

During their struggle with the Girondists, the Montagnards gained the upper hand in the Jacobin Club, and for a time "Jacobin" and "Montagnard" were synonymous terms. The Mountain was successively under the sway of such men as Marat, Danton, and Robespierre.

"Mountain" by Stereolab


"The Mountain" by the Heartless Bastards