"People have been calling on the economics profession to make some fairly serious revisions to the way the subject is taught.... I think there’s one thing that really can’t be denied: when this particular phoenix rises from the flames, it ought to leave the Efficient Markets Hypothesis back in the ash pit.... Efficient markets gets a chapter of its own in John Quiggin’s Zombie Economics as an idea that won’t go away, no matter how thoroughly it’s refuted.... The temptation will be to try and avoid going “cold turkey” on efficient markets, by reducing the overarching claims, but hanging on to the general story that markets are 'broadly efficient'.... The hypothesis that there is no information in the past history of share prices which can be used to predict the future... doesn’t work.... Companies like AQR have been offering funds based on them, and generally outperforming, for ages. And when you get to anything stronger than the very-weak form versions, the performance is really quite embarrassing. Robert Shiller’s share of the Nobel Prize was for noticing that securities prices are, in general, much too volatile to make sense as forecasts.... DeLong, Summers, Shleifer & Waldmann have shown that there is no real theoretical basis to the idea that 'traders competing against each other make markets efficient'--it’s just as likely that they create meaningless volatility. Market prices are... a weighted average of the views of a large group of well-resourced and intelligent people with an incentive to get things right. But nobody would build a theory of politics around the infallibility of opinion polls.... All that’s really left of market efficiency is a sort of woolly idea that 'it’s difficult to make money in the stock market'. Which it is, but it’s pretty difficult to make money in any other way too, a fact which has fewer implications for fundamental economic truth than you’d think..."(via DeLong)
Rather than hauling those three musketeers into Judge Thomas Wheeler’s court, which his lawyers will do next week, Greenberg should be taking them out to dinner. The only mystery about the lawsuit is why Wheeler allowed it to proceed this far. In 2012, Judge Paul Engelmayer, a federal judge in New York, tossed out a similar case, noting that A.I.G.’s board had voluntarily agreed to the terms of the September, 2008, bailout, seeing it as the only option to avoid bankruptcy. For whatever reason, Wheeler, whom George W. Bush appointed to the bench in 2005, decided that the case raises sufficient legal issues to proceed.
Perhaps he is taking seriously Boies’s contention that the bailout violated the Fifth Amendment, which prevents the federal government from seizing private property without proper compensation. But, of course, this wasn’t a seizure—it was a bailout. Or perhaps Wheeler wants to explore whether the Fed overreached the lending authorities that Section 13.3 of the 1932 Federal Reserve Act grants it. There’s no doubt that this statute was drawn up vaguely, but that was deliberate. During the Great Depression, as in September, 2008, the Fed faced a potential cataclysm, and it needed some freedom to maneuver, which Congress granted it.
The Washington Post treated us to "five myths about billionaires" this morning. Incredibly, they missed the most obvious one: that billionaires know anything special about what is good for the country and the world.
Most billionaires (at least those who didn't inherit the money) are probably smart and hard-working, but so are millions of other people. What most distinguishes someone like Bill Gates from the hundreds of thousands of other software entrepreneurs is luck and sharp elbows. Suppose IBM had refused to allow Gates to keep control of the Dos operating system? Gates might still be very rich, but certainly not the richest man in the world. Alternatively, if the government still enforced anti-trust laws Microsoft might have faced serious penalties for engaging in textbook anti-competitive practices to get and keep a near monopoly in operating systems, Gates also would not have the fortune he has today.
Anyhow, there is no reason to think that Gates' luck and ruthlessness make him particularly competent to pass judgement on world poverty, education, or any of the other issues for which he is now viewed as an authority. The same applies to the other billionaire policy types cited in the piece. While these people obviously have the money to ensure that their views carry force in the world, there is no more reason to think that these billionaires' judgements on public policy carry particular value than the judgements of people who win the lottery.
"Re: "Last week, Fisher argued that a so-far unpublished (i.e. secret) paper by his staff showed that “declines in the unemployment rate below 6.1 percent exert significantly higher wage pressures than if the rate is above 6.1 percent.”
First we had the 90% cliff and now we have the 6.1% cliff. OMG! Where are the grad students when we need them?"
So if you wanted to critique my (and Kalecki’s) characterisation of the views of the wealthy, you might say that keeping unemployment above its natural rate is not a sustainable strategy (and therefore not rational). To which I would respond maybe, but there could be a reason why now, like the 1980s, is a particularly important time to keep unemployment high for a while.
The reason for this is that the aftermath of financial crisis is extremely threatening to the neoliberal political consensus and the position of the 1%. I remember saying shortly after the crisis that the neoliberal position that government regulation was always bad and unregulated markets always good had been blown out of the water by the crisis. This was politically naive, in part because a crisis caused by unregulated markets was morphed by the right into a crisis caused by too much government debt, or too many immigrants. But that fiction will not be sustainable once a strong recovery has reduced both government debt and unemployment. For the 1%, these are very dangerous times, and they want to be on favourable territory for the battles ahead.See Piketty.
We argue that this consensus – with its methodological commitment to optimization by rational agents, its uncritical faith in central banks, and its support for the norms of “sound finance” – has offered a favorable environment for arguments for austerity. Even the resounding defeat of particular arguments for austerity is unlikely to have much lasting effect, as long as the economics profession remains committed to a view of the world in which in which lower government debt is always desirable, booms and downturns are just temporary deviations from a stable long-term growth path, and in which – in “normal times” at least -- central banks can and do correct all short-run deviations from that optimal path. Many liberal, New Keynesian, and “saltwater” economists have tenaciously opposed austerity in the intellectual and policy arenas. But they are fighting a monster of their own creation.Strange Defeat
Richard Fisher, the president of the Dallas Federal Reserve, has an op-ed in Monday’s Wall Street Journal warning that the Fed’s current policy risks sparking high inflation. “Given the rapidly improving employment picture, developments on the inflationary front and my own background as a banker and investment and hedge fund manager,” Fisher writes, “I am increasingly at odds with some of my respected colleagues at the policy table of the Federal Reserve as well as with the thinking of many notable economists.”
This isn't the first time Fisher has been at odds with his colleagues. When the Fed undertook “Operation Twist” in 2011, Fisher was one of three members of the Federal Open Market Committee—the committee that decides Fed policy—to dissent. He's also been the committee’s staunchest inflation hawk, and Monday’s op-ed was just the latest of many warnings Fisher has issued over the past few years about supposed forthcoming inflation. Here are five examples since 2011:
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"I'd rather see the Texification of the United States than the Californification. California's a beautiful place. I was born there, and I go out there often."Krugman:
How it all turns out is anyone’s guess — maybe we eventually see a California scenario on a national basis, with the growing diversity of the electorate and the evident madness of the right delivering an overwhelming Democratic majority; maybe we see some exogenous event tip the balance back to the GOP despite what looks like a trend the other way. But what I don’t think we’ll see, even if there’s a Clinton in the White House, is another Clinton era in which liberalism is afraid to take a stand.
Consider, first, the history of the gold standard. Though Lehrman claims that the gold standard is “the historic common currency of civilization” and the “proven guarantor of one hundred years of price stability,” the history of gold is far more nuanced. Silver actually was the dominant metallic standard for hundreds of years before gold. The main reason it was displaced by gold is not that gold was inherently better, but that important countries, including the U.K. and the U.S., introduced bimetallism—legally minting silver and gold into money—and did so at exchange rates that inadvertently led to the undervaluation of silver. This undervaluation eventually drove silver out of circulation as money. Gold became the money standard largely by accident.
In the U.S., bimetallism was introduced in 1792. Soon afterward, changing market prices led to an overvaluation of silver at the mint and a de facto silver standard that lasted until 1834. Congress then changed the mint ratio and, in an instant, gold became overvalued, and would serve as the monetary standard from 1834 to 1861. This change was part of President Andrew Jackson’s famous war on the Second Bank of the United States, whose bills were backed by silver. There was nothing market-driven or natural about this switch from a silver standard to a gold standard. It was pure politics.
That gold was an accident of history is further evident in the contentious debate over a gold standard versus a bimetallic standard after the Civil War. Convertibility of dollars into metals had ended with the Civil War, and Congress had set 1879 as the year it would resume. Congress, however, failed to authorize the further coinage of silver. This meant that dollars would be convertible only into gold. Had silver still been coined at the mint, it would have become, by 1879, the de facto money standard, given market prices. This shift to gold irritated many, particularly those who thought gold was too deflationary; this was such a concern that it became the defining issue of the 1896 presidential election. Only with the Gold Standard Act of 1900 was the possibility of monetizing silver permanently put to rest. If gold was the “currency of civilization” for centuries, as Lehrman claims, why was its success an accident, and why has the U.S. money standard always been so contentious?
Lehrman also claims that politicians cannot manipulate a gold standard as they can fiat currency, because the gold supply depends on real-world gold production. But the above examples and others (such as the suspension of convertibility during the Civil War and FDR’s confiscation of gold in 1933) clearly show that even the gold standard is susceptible to manipulation.
That the U.S. gold standard was an accident of history and that its longest unchallenged, continuous run was only a quarter of a century suggests the question: Was it was the gold standard, per se, that created the long-run price stability of the 18th and 19th centuries, or was it a deeper political and institutional commitment to price stability?
My http://angrybearblog.com/2014/07/anchored-perceived-inflation-or-how-fox-news-helped-obama.html has received more attention than I would have guessed. This should be a semi-serious post on the topic.
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In any case there is clear evidence that a sudden drop in the price of petroleum does not cause respondents to forecast extremely low inflation in the future. In constrast sudden increases in the price of petroleum correspond to unusually high forecast inflation.
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Only later and less dramatically is there the genuinely puzzling anomaly. Median forecast inflation was consistently higher than lagged inflation for the past two and a half years. This is suprising.
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It is not. Using all the Michigan survey data, this coefficient is almost exactly zero and, in fact, slightly positive. There is no evidence that survey respondents place more weight on food and energy prices than on other prices.
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The indicator for 2009 and later is strongly significant and corresponds to forecast inflation being higher than expected by about 0.85%.
This is not a huge anomaly, but it is quite important. Some prominent economists feared that the extremely slack demand at a time of already low inflation would cause deflation. The fact that inflation has continued with high unemplyment suggests that at extremely low inflation rates, expected inflation ceases to affect wage bargains. The idea is that actual reductions in dollar wages are avoided. With normal pressures for variation in relative wages, this means that some nominal wages increase. This is a very old story. The continued increase in hourly wages at a an annual rate varying from about 1% to about 2.5% can be explained this way.
However, it is also possible that high unemployment has caused workers to accept a fairly rapid decline in subjectively expected real wages on the order of one to two percent a year. The systematic over estimate of future inflation would mean that this corresponds to puzzlingly stable achieved real wages.
Now that I am being semi-serious, I have to admit that I can’t determine the cause of the anomalously high forecasts since 2009. In 2009 itself it is not easy to guess the effects of the then recent extreme fluctuations in the price of petroleum. More generally many things have changed. My first guess is that the combination of a Democrat in the White House and fully developed Fox News leads to high inflation illusion. However, I could fit the anomaly very well using an indicator of unconventional monetary policy — say the ratio of total Fed liabilities to GDP. It is certainly true that prominent commentators predicted that the huge expansion of high powered money would cause high inflation. There is no way to know if they would have made the same prediction with a Republican in the White House.
When discussing the effects of unconventionally monetary policy through expected inflation (the Krugman-Woodford story) I have been very skeptical for two reasons. First huge interventions were associated with tiny changes in bond prices (often of the wrong sign). Second the expectations which matter are not those of bond traders but of house builders. Bond traders pay obsessive attention to the FOMC of the Fed.
I now think these two criticisms might cancel out. Bond traders also look at official measures of inflation. This doesn’t mean they think the indices are good or correspond to the cost of living. They do this just because the Fed looks at those indices. However, this may mean that stories about how loose monetary policy is causing high inflation might have more effect on economic agents other than bond traders. This means that the loose money might have caused higher investment through lower subjective expected real interest rates even if it didn’t bring inflation up to target.
Sarah Kliff: Separate circuit court rules in favor of Obamacare subsidies: "The Fourth Circuit Court of Appeals...
ruled Tuesday afternoon that Obamacare subsidies could be offered through federally-run insurance marketplaces.It is... clear that widely available tax credits are essential to fulfilling the Act’s primary goals and that Congress was aware of their importance when drafting the bill," the Fourth Circuit Court ruled.
We'll have more coverage soon...."
Still, we try. New Keynesians do stuff like one-period-ahead price setting or Calvo pricing, in which prices are revised randomly. Practicing Keynesians have tended to rely on “accelerationist” Phillips curves in which unemployment determined the rate of change rather than the level of inflation.
So what has happened since 2008 is that both of these approaches have been found wanting: inflation has dropped, but stayed positive despite high unemployment. What the data actually look like is an old-fashioned non-expectations Phillips curve. And there are a couple of popular stories about why: downward wage rigidity even in the long run, anchored expectations.
The point, however, is that the price-setting side of the models has never been an integral part of Keynesian doctrine, and the surprising resilience of inflation hasn’t undermined the core insights.
And it remains true that Keynesians have been hugely right on the effects of monetary and fiscal policy, while equilibrium macro types have been wrong about everything.
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So the record here is crystal clear. It's almost as clear as his position on the Affordable Care Act, which is that it should be repealed "root and branch." But in Kentucky, that would mean eliminating the state's popular insurance exchange, Kynect, and its successful Medicaid expansion. So McConnell is also trying to disclaim that position as well, suggesting—again, not credibly—that Kentucky could keep all of Obamacare's goodies even if Republicans repeal the law in its entirety. That swindle would be impossible to perpetrate under most circumstances, but McConnell's managed to pull it off because the Grimes campaign doesn't really want to make Obamacare an issue, even when they can use it to press their own advantage.
If you follow domestic politics closely, this is pretty disorienting. Its reminiscent of Mitt Romney's first debate with President Barack Obama, when he disavowed the fiscal agenda that defined his candidacy. At the time, Obama aides cited that about-face as one of the reasons Obama performed so poorly that night.
That strategy backfired on Romney as the campaign wore on. The question now is whether it'll backfire on McConnell—if not for what it suggests about his forthrightness than for what it says about his effectiveness as a potential majority leader.
Repealing Obamacare and implementing the Ryan budget is what the GOP exists to do. And if the top Republican in the Senate won't defend his party's positions politically, there's every reason to suspect the party itself wouldn't be able to execute on the vision, if ever given the chance.
Lawmakers obsessed with getting a community banker on Fed board. Fed watcher/monetary types utterly indifferent on this.Maxximilian Seijo:
Republicans keep asking about community bankers rather than the unemployed.Should Janet Yellen Be Giving Us Stock Picks? by Neil Irwin
Late yesterday, the GOP-controlled House overwhelmingly passed a temporary $10.9 billion fix to the Highway Trust Fund, replenishing it until next spring. The White House had warned insolvency could grind state infrastructure projects to a halt and cost as many as 700,000 jobs. As Glenn Kessler explains, this figure is probably overstated. But economic firms such as Moody’s Analytics were warning that failure could imperil the recovery just when it may be poised to accelerate.
The House GOP fix is loaded with gimmicks, and it defers the tougher decisions over how to keep the fund going over the long term. But it avoids a short term disaster, so the White House is supporting it grudgingly. I’m told the Dem-controlled Senate will likely pass it. “We’ll probably end up passing theirs,” a Senate Dem aide emails.
Conservative groups such as Heritage Action had warned darkly that Republicans must not “bail out” the HTF. Yet the HTF fix passed the House by 367-55. As the New York Times observes, this was “another in a series of defeats for conservative groups” who think “responsibility for highways and bridges should return to state and local governments.”