Neo-Paleo-Keynesiansim

Neo-Paleo-Keynesianism: A suggested definition by Roger Farmer

corporate buy backs

Still Disgorging by J.W. Mason

Disgorge the Cash by J.W. Mason

global economic signals: bond rates, inflation expectations, commodity prices

The Depressing Signals the Markets Are Sending About the Global Economy by Neil Irwin

New Classical economics

Explaining the Hegemony of New Classical Economics by David Glasner

macro

The entirely predictable recession by Simon Wren-Lewis

How did America's austerity beginning in 2011 compare? How did QE compenstate?

The Dismal Science 'Seven Bad Ideas,' by Jeff Madrick reviewed by Paul Krugman

economic debate

Influencing the Debate from Outside the Mainstream: Keep it Simple by Dean Baker

Ultimately what killed the Boskin Commission report was the refusal of Richard Gephardt, the leader of the Democrats in the House to go along with the plan.[6] His opposition was key, because Gephardt was the most credible challenger at the time to then Vice-President Al Gore for the Democratic Presidential nomination in 2000. There was no better issue that Gephardt could have been given in the Democratic primaries than a cut in Social Security benefits. Gephardt could point to Gore as the person who cut your Social Security benefits, while he was the guy who tried to stop him. 

Without Gephardt’s buy in, Clinton was not about to go forward. It also helped that the stock bubble and faster than projected growth led the deficit to fall much more than had been projected. It is worth noting that in spite of the near unanimity of the leading lights in the economics profession on the existence of a large bias in the CPI, the Bureau of Labor Statistics did not take steps to correct most of the bias identified by the Boskin Commission. The Government Accountability Office surveyed the four surviving members of the Boskin Commission in 2000. (Zvi Grilliches had died the prior year.) In their assessment, more than 0.8 percentage points of the bias they identified in the CPI remained even after BLS had made a series of changes in the index.[7] Yet few economists take account of this bias in their work or in discussions of economics policy.

...

This was a simple way to show the 7.0 percent assumption was nonsense. Either price to earnings ratios would have to rise into the hundreds or it would be necessary to have stories of the whole corporate sector paying out more than their 100 percent of their after-tax profits in dividends. No self-respecting economist wanted to be associated with either of these positions. 

We first posted this challenge on our website, however we were already in the early days of the blogosphere. Many progressive econ bloggers soon picked it up. This led to howls of anguish and outrage by conservatives. Some threw in the towel and acknowledged that it could not be done. Others wanted to change the assumptions so that we had more rapid GDP growth or a shift in income from wages to profits. 

Finally Paul Krugman blasted the test into the national debate with a column in early February.[11] This exposed the fact that the privatizers were essentially just making up numbers. By showing there was no pot of gold in the private accounts, we were able to take the money out of it for typical workers. This drove home the point that there was no real potential for gain with privatization along the lines being proposed, just additional risk. This helped prevent the privatization plan from gaining any momentum. By the spring, most Republican members of Congress were running away from privatization as fast as they could.

macro, Keynes and monetarism

Their Own Imaginary Keynes (Wonkish) by Krugman

IS-LM as “Obfuscation”? No: Thursday Focus for September 11, 2014 by DeLong

Nick Rowe on Money and Coordination Failures by David Glasner

What Is Special About Recessions in a “Monetary Economy”: Trollng Nick Rowe: Wednesday Focus for September 10, 2014 by DeLong

misc. links from Baker, Bernstein, Kaminska, Sumner, Williamson, and Wren-Lewis

The Federal Reserve Board Responds to Bankers by Dean Baker

The symmetry test by Simon Wren-Lewis

Elsa the Ice Princess on Monetary Policy by Jared Bernstein

What is not a Ponzi? by Isabella Kaminska

DeLong on the mother of all black swans by Scott Sumner

Secular Stagnation: Useful Ideas or Hot Air? by Stephen Williamson

hedge funds and the euthanasia of the rentier

Capital Decimation Partners: slight return by Daniel Davies

Investors Pay for Hedge-Fund Illusions by Noah Smith

Innovation in Higher Ed, 1680 Edition by J.W. Mason

Makes me think of Nate Silver's Signal and the Noise and wishes he had a chapter on hedge funds.

the cultural vogue for zombie apocalypse

Zombies and Congressional Dysfunction: What’s the Connection? by Jared Bernstein

The Walking Dead on AMC has been a huge hit. This summer on his HBO Show, Bill Maher ticked off Republican "Zombie lies" like trickle-down economics. I thought of Quiggin's book. Maybe Maher and his writers got it via Krugman. Right now the FX channel has the alien vampire zombies of The Strain. (Patient zero is "The Master," a squid-like vampire alien.) In September, the Syfy channel will have a series titled "Z Nation" about a zombie apocalypse.

Since I pay attention, the 2008 financial crisis was scary as was the recent debt ceiling clown show. I've become less worried and a little inured to it since Obama faced the Republicans down and the Fed has resolution authority, bit if we hit the next recession while at the Zero Lower Bound - and given the hatred for bailouts - we could enter Mad Max territory:



Fortunately Yellen seems to get it and understands the danger of raising rates too quickly. Also the debt-to-GDP ratio is low again, not that it ever was seriously a problem. There will be less fiscal drag going forward.

Also the movie Pacific Rim, with its Jaegers versus Kaiju. The Japanese are making a push with Abenomics. Germany and Europe are struggling. (Although Germany is riding a bit high after winning the World Cup. But then again Ukraine.)

I'd add that shows like Masters of Sex and The Knick are more hopeful from a progressive perspective. They suggest a hope in science and empiricism like we've seen in the Obama stimulus, QE, and Obamacare. And progress on the social front like gay marriage, a black two-term President and marjuana decriminalization. There's a lot of shows about hospitals, like House.

the economy

OVER AT EQUITABLE GROWTH: WHY IS EMPLOYMENT TODAY SO MUCH LOWER THAN WE EXPECTED SEVEN YEARS AGO?: (LATE) MONDAY FOCUS FOR AUGUST 5, 2014 by DeLong

What's Holding the Economy Back: Revised Version by Dean Baker

Another Reminder About the Stupidity of Austerity by Josh Bivens

Strange Defeat: Supreme Court, New Keynesians and Democrats

The Anti-Court Court by David Cole

Conservatism was able to hold on thanks to Bush v. Gore and install Roberts even though Bush lost the popular vote by half a million votes.

Strange Defeat by J.W. Mason

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

Strange Death of Liberal England

I'm still digesting the heterodox critique of New Keynesiansim. They don't have a well-defined counter-narrative except that NK is too focused on equilibrium and the self-correcting nature of the macroeconomy and supply and demand. See the debate Piketty sparked.

Barney Frank letter in response to Elizabeth Warren’s Moment 

supply side

Yeah I know, weird little random blog post. My aim is to clean up the meme links (Piketty, Philips curve and macro wars, German trade surplus, Floor system) and add them to the side bar.

But basically I was thinking how Democrats need to be come the force for demand side solutions. Leave the supply side to the Republcians. Education reform? Attacking the teachers unions with Campbell Brown. It was funny how she wouldn't divulge who was funding her efforts.

Universal Basic Income, NGDP level path targeting and helicopter drop versus the social democratic welfare state, unemployment and wage inflation, and money-financed government spending, what's the commonality. Conservatives like to get govenrment out of the way but economic demand stabilization is seen by most Republicun economist as the thing wedge of socialism.

Bernstein on GDP:

A potentially important development: is the improving job market helping to stabilize the labor force?

"The idea is that if greater labor demand pulls people into the labor market who are currently sitting out, that will boost GDP growth, which is roughly the sum of productivity growth plus labor force growth."

But what is productivity growth?

Another thing about the macro wars: New Keynesianism wasn't setting off alarm bells over the housing bubble and overleveraged financial sector even if people like Shiller, Rajan and Baker were. There weren't alarm bells over the shadow banking sector.

inflation (or a lack thereof) and the rightwing fever swamp

IS U.S. AT IMMEDIATE RISK OF BECOMING "ARGENTINA"?: MONDAY SMACKDOWN/THE HONEST BROKER FOR THE WEEK OF JULY 12, 2014 by DeLong

DeLong against the synthesis

MONETARIST, KEYNESIAN, AND MINSKYITE DEPRESSIONS ONCE AGAIN: YES, LLOYD METZLER WAS THE GREATEST CHICAGO MACROECONOMIST EVER: THE HONEST BROKER FOR THE WEEK OF JULY 19, 2014 by DeLong

asset price "inflation"

"Asset price inflation" is not inflation by Noah Smith

Cochrane, axiomatization, and formalism

Ancient Economists: Two Views by J.W. Mason

Another Complaint about Modern Macroeconomics by David Glasner

John Cochrane on the Failure of Macroeconomics by David Glasner

Morning Plum: Once again, Republicans tell Tea Party to get lost

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.”

Minsky

Dan Davies comment at the Slack Wire

Well, there is the problem Minsky identified, of chasing yield from prudent standards of risk-taking into ponzi schemes.

This is a really common misunderstanding of Minsky, and it's his (and Charles Kindleberger's for endorsing it) fault for selecting a needlessly and misleadingly pejorative set of names for his financial structures.

A "Ponzi" project in Minsky's terminology isn't a Ponzi scheme, and it has no built in tendency to collapse. It's just a project that, for a meaningful period after its inception, doesn't generate enough cash flow to cover interest payments and so has to increase its debt to keep going. 

So, an example of a "Ponzi" project in Minsky's terminology might be ... going to university. College students don't generate cash flow and increase their debt to cover operating expenses.

And note, of course, that the classification of projects as hedge, speculative or Ponzi depends entirely on the term of the lending. There's no necessary connection between the riskiness of a project and its financing profile. For example, building a toll road between two highly-populated cities would be very likely a Ponzi project, but it is a very low risk loan indeed (similarly, shipping finance has this characteristic). Minsky had a Financial Instability Hypothesis, not a RealInstability Hypothesis, and most of the "risky" projects that he talks about are only really risky because they are exposed to the very liquidity risk that Josh (correctly) notes is reduced in an environment of surplus liquidity. It's a real misreading of Minsky to re-profile him as a theorist of Austrian-style malinvestment.

JW Mason replies

Yes, agree completely. 

One reason Minsky introduced these distinctions was to highlight the effects of changes in financial conditions on existing balance sheet commitments. In particular, since the line between speculative and Ponzi finance depends on a unit's ability to make current interest payments, where the line falls depends on the interest rate. "A speculative financing arrangement can be transformed into a Ponzi finance scheme by a rise in interest ... if earnings are better or costs, especially interest rates, fall, Ponzi financing may be transformed into speculative financing." The idea that low rates encourage risky financial commitments implicitly assumes that interest rates are known in advance, before the commitments are made. But in the real world, the effect of interest rate changes on the riskiness of existing commitments is more important.

This is the big argument of my "Fisher dynamics" papers -- the rise in interest rates under Volcker moved the aggregate balance sheet of the US household sector from speculative to Ponzi, despite a reduction in expenditure relative to income. (Although neither Arjun or I thought of using that language -- I'll have to add it to the next version.) As DD says, if you take Minsky seriously, then a concern with financial fragility favors keeping rates low, even if that does encourage taking on more "real" risk. 

 Six days later Bruce Wilder replies (after doing research?)

Minsky was a supremely articulate man, and I am sure he chose pejorative labels, advisedly.

D^2's example of a project to build a toll road, with its heavy element of construction financing, is a terribly misleading way to present Minsky's concept of Ponzi finance. Minsky's idea is not that some possibly worthwhile investment projects are Ponzi projects, but that the overall standard for fixing leverage ratios, in financing the nominal ownership and control of business assets, can shade over time, from predominately Hedge finance to Speculative finance, as conventions and expectations are shaped by recent experience.

For Minsky, Hedge finance, Speculative Finance, and Ponzi finance were three Ideal Types, corresponding to progressively greater debt to income ratios, that is, greater leverage, and possibly representing successive stages in the dynamic capital development of an economy progressing thru a cycle.

His notion was that one or another could be said to prevail in the economy at any one point in time, as conventional standards of what constitutes shrewd, but prudent judgment in borrowing and lending evolve, with common experience and expectations. When Hedge finance predominates, the economy as a system, in Minsky's view, is likely to be resilient, and apparently self-stabilizing in response to exogenous shocks or policy interventions, like a change in policy interest rates.

Experience with such stability, however, is likely to lead to greater and successful risk-taking by bankers and entrepreneurs, taking the economy toward a state in which speculative finance predominates, there is more debt introduced into the economy and higher leverage, which may take the economy into a sustained boom, and even to a state in which Ponzi finance predominates. 

An economy in which speculative finance predominates may not be as resilient, and an economy in which a standard of Ponzi finance prevails, may be at hazard of crisis and debt-deflation.

The ownership and control of a toll road could be financed to any of the three standards -- hedge, speculative or ponzi. The ultimate point of Minsky's scheme, though, is the dynamics by which such a business could be shifted, along with the economy as a system, along a continuum from one state to the next, from the cautious conservatism of hedge finance, through a heady period in which appreciation feels like growth in revenues, to pondering disinvestment as a way to channel more of the quasi-rents to debt or equity payments.

I think the term, Ponzi finance, was very much chosen to highlight the inevitability of collapse inherent in such a standard of finance.

Hyman Minsky at Wikipedia

Minsky proposed theories linking financial market fragility, in the normal life cycle of an economy, with speculative investment bubbles endogenous to financial markets. Minsky claimed that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As a result of such speculative borrowing bubbles, banks and lenders tighten credit availability, even to companies that can afford loans, and the economy subsequently contracts....

The "hedge borrower" can make debt payments (covering interest and principal) from current cash flows from investments. For the "speculative borrower", the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The "Ponzi borrower" (named for Charles Ponzi, see also Ponzi scheme) borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat. 

If the use of Ponzi finance is general enough in the financial system, then the inevitable disillusionment of the Ponzi borrower can cause the system to seize up: when the bubble pops, i.e., when the asset prices stop increasing, the speculative borrower can no longer refinance (roll over) the principal even if able to cover interest payments. As with a line of dominoes, collapse of the speculative borrowers can then bring down even hedge borrowers, who are unable to find loans despite the apparent soundness of the underlying investments.

...

Economist Paul McCulley described how Minsky's hypothesis translates to the subprime mortgage crisis.[11] McCulley illustrated the three types of borrowing categories using an analogy from the mortgage market: a hedge borrower would have a traditional mortgage loan and is paying back both the principal and interest; the speculative borrower would have an interest-only loan, meaning they are paying back only the interest and must refinance later to pay back the principal; and the ponzi borrower would have a negative amortization loan, meaning the payments do not cover the interest amount and the principal is actually increasing. Lenders only provided funds to ponzi borrowers due to a belief that housing values would continue to increase. 

McCulley writes that the progression through Minsky's three borrowing stages was evident as the credit and housing bubbles built through approximately August 2007. Demand for housing was both a cause and effect of the rapidly expanding shadow banking system, which helped fund the shift to more lending of the speculative and ponzi types, through ever-riskier mortgage loans at higher levels of leverage. This helped drive the housing bubble, as the availability of credit encouraged higher home prices. Since the bubble burst, we are seeing the progression in reverse, as businesses de-leverage, lending standards are raised and the share of borrowers in the three stages shifts back towards the hedge borrower. 

McCulley also points out that human nature is inherently pro-cyclical, meaning, in Minsky's words, that "from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control. In such processes, the economic system's reactions to a movement of the economy amplify the movement – inflation feeds upon inflation and debt-deflation feeds upon debt deflation." In other words, people aremomentum investors by nature, not value investors. People naturally take actions that expand the high and low points of cycles. One implication for policymakers and regulators is the implementation of counter-cyclical policies, such as contingent capital requirements for banks that increase during boom periods and are reduced during busts.

euthanasia of the rentier

The Rentier Would Prefer Not to Be Euthanized by J.W. Mason

Here’s another one for the “John Bull can stand many things, but he cannot stand two percent” files. As Krugman says, there's an endless series of these arguments that interest rates must rise. The premises are adjusted as needed to reach the conclusion. (Here's another.) But what are the politics behind it? 

I think it may be as simple as this: The rentiers would prefer not to be euthanized. Under capitalism, the elite are those who own (or control) money. Their function is, in a broad sense, to provide liquidity. To the extent that pure money-holders facilitate production, it is because money serves as a coordination mechanism, bridging gaps — over time and especially with unknown or untrusted counterparties — that would otherwise prevent cooperation from taking place. [1] In a world where liquidity is abundant, this coordination function is evidently obsolete and can no longer be a source of authority or material rewards. 

More concretely: It may well be true that markets for, say, mortgage-backed securities are more likely to behave erratically when interest rates are very low. But in a world of low interest rates, what function do those markets serve? Their supposed purpose is to make it easier for people to get home loans. But in a world of very low interest rates, loans are, by definition, easy to get. Again, with abundant liquidity, stocks may get bubbly. But in a world of abundant liquidity, what problem is the existence of stock markets solving? If anyone with a calling to run a business can readily start one with a loan, why support a special group of business owners? Yes, in a world where bearing risk is cheap, specialist risk-bearers are likely to go a bit nuts. But if risk is already cheap, why are we employing all these specialists? 

The problem is, the liquidity specialists don’t want to go away. From finance’s point of view, permanently low interest rates are removing their economic reason for being — which they know eventually is likely to remove their power and privileges too. So we get all these arguments that boil down to: Money must be kept scarce so that the private money-sellers can stay in business. 

It’s a bit like Dr. Benway in Naked Lunch: *

“Now, boys, you won’t see this operation performed very often and there’s a reason for that…. You see it has absolutely no medical value. No one knows what the purpose of it originally was or if it had a purpose at all. Personally I think it was a pure artistic creation from the beginning. 

“Just as a bull fighter with his skill and knowledge extricates himself from danger he has himself invoked, so in this operation the surgeon deliberately endangers his patient, and then, with incredible speed and celerity, rescues him from death at the last possible split second…. "

Interestingly, Dr. Benway was worried about technological obsolescence too. “Soon we’ll be operating by remote control on patients we never see…. We’ll be nothing but button pushers,” etc. The Dr. Benways of finance like to fret about how robots will replace human labor. I wonder how much of that is a way of hiding from the knowledge that what cheap and abundant capital renders obsolete, is the capitalist?

EDIT: I'm really liking the idea of Larry Summers as Dr. Benway. It fits the way all the talk when he was being pushed for Fed chair was about how great he would be in a financial crisis. How would everyone known how smart he was -- how essential -- if he hadn't done so much to create a crisis to solve?

[1] Capital’s historic role as a facilitator of cooperation is clearly described in chapter 13 of Capital.

 * where Steely Dan got its name.

Larry Page echoes Alexander Cockburn

via Econospeak

I totally believe we should be living in a time of abundance, like Peter Diamandis' book. If you really think about the things that you need to make yourself happy - housing, security, opportunities for your kids - anthropologists have been identifying these things. It's not that hard for us to provide those things. The amount of resources we need to do that, the amount of work that actually needs to go into that is pretty small. I'm guessing less than 1-percent at the moment. 

So the idea that everyone needs to work frantically to meet people's needs is just not true. I do think there's a problem that we don't recognize that. I think there's also a social problem that a lot of people aren't happy if they don't have anything to do. So we need to give people things to do. We need to feel like you're needed, wanted and have something productive to do. 

But I think the mix with that and the industries we actually need and so on are-- there's not a good correspondence. That's why we're busy destroying the environment and other things, maybe we don't need to be doing. So I'm pretty worried. Until we figure that out, we're not going to have a good outcome.