Trade Deficits and the Dollar by Dean Baker

In prior posts I have often referred to the run-up in the dollar engineered by the Clinton-Rubin-Summers team in the 1990s as being the root of all evils. The point is that their over-valued dollar policy led to a large trade deficit. The only way the demand lost as a result of the trade deficit (people spending their money overseas rather than here) could be offset was with asset bubbles. 

To fill this demand gap, the Clinton crew gave us the stock bubble in the 1990s and the Bush team gave us the housing bubble in the last decade. In both cases the bubbles crashed with disastrous consequencees, the latter more than the former. (It took us almost 4 years to replace the jobs lost in the 2001 recession, so that downturn was not trivial either.) 

Anyhow, my take away from this story is that, using the advanced economics from Econ 101, we need to get the dollar down. I have made this point in the past and readers have often commented that trade does not appear to be responding as would be predicted from a falling dollar. I would argue otherwise. The graph below shows the non-oil trade deficit measured as a share of GDP against the real value of the dollar.


Source: Bureau of Economic Analysis and the Federal Reserve Board. 

This picture looks pretty much like the textbook story. The dollar has fallen nearly back to its 1995 level and the deficit as a share of GDP has fallen almost back to is 1995-1997 level as well. (There are lags, so trade does not adjust immediately to changes in the dollar's value.) Before anyone starts jumping up and down about pulling oil out of the picture, let me explain.
Oil prices have more than quadrupled over this period causing us to have a much larger deficit from oil imports. (Sorry, I have not deducted oil exports because they were not available from the same table.) Demand for oil is relatively inelastic. This means that when oil prices go up, if nothing else changed, we would expect our trade deficit to rise as the increase in the price of oil more than offsets the decline in quantity. 

The textbook response to the increase in oil prices and the rise in the trade deficit would be that the additional outflow of dollars would cause a further decline in the value of the dollar. This decline in the dollar leads to reduction in imports and an increase in exports, which effectively allows the country to pay for higher priced oil. 

In other words, if we followed the textbook story, we should expect to see a somewhat lower valued dollar today than in 1995 as a result of higher oil prices. This would cause us to have a reduced deficit, or even trade surplus, on non-oil products. This would mean that the dollar has to fall somewhat more than it already has in order to bring our trade deficit back to its mid-90s level. 

It looks to me like the intro textbook story is still doing pretty well.

Monetary Stimulus Is About Domestic Demand Not Exports and "Competitiveness" by Yglesias

Blue-Skying

Yglesias has mentioned this (as have Nixon and Milton Friedman?*)

From Atrios:

Day I sometimes write for elsewhere. Was going to write about how we need to give people free money, but over the weekend everyone got there first.

Just Give People Money by Karl Smith (mentions Chris Hayes)

Thinking Utopian: How about a universal basic income? by Mike Konczal

There's A Way To Give Everyone In America An Income That Conservatives And Liberals Can Both Love by Joe Weisenthal

I don't think conservatives will go for it because they believe people will just spend everything on booze and drugs as soon as they get the check. Plus it will attract immigrants.

Still I think it's a good idea. To stimulate the economy, the Department of Demand Management could add money to people's accounts. To combat inflation and an overheating economy, they could take money out of their accounts. 

Sort of like what the Trading Desk at the New York Fed does with the banks who are primary dealers.

*Friedman has as a negative income tax. Nixon I'm not sure. I think he floated the idea but it got shot down, sort of like when Clinton floated the idea of investing the Social Security trust fund in the stock market. The Wall Street Journal editorial pages blew a gasket because that would be the government appropriating the means of production. I laughed out loud.

Monetary Policy and Equity Prices at the Zero Lower Bound by Carola Binder

Daenerys Targaryen

My comment: 

Yeah she was treated as a slave by Viserys and sold off to Drogo. And when the khalasar was attacking the Sheeple, she talked Drogo into stopping the rapes. As Jorah said, she "has a gentle heart." 

She seems more like the abolitionist John Brown than Lincoln. One of the showrunners described her as being a Joan of Arc type. As she tells Jorah and the spice trader in Quarth, she believes herself special and blessed with magic. She wasn't burned by the fire. She hatched the dragon eggs. No one's going to stand in her way, not Warlocks, not slavetraders. She's on a divine mission.

AV Club reviews "The Bear and the Maiden Fair" from Game of Thrones (newbie)

AV Club reviews "The Bear and the Maiden Fair" from Game of Thrones (expert)

Game of Thrones, Season 3: Lions and dragons and bears. Oh my. By Rachael Larimore and Matthew Yglesias

Recovery in their time by Ryan Avent

Based on this Mr Crafts reckons that central-bank independence could be self-defeating at the zero lower bound. That's interesting, and quite a different argument from the more common recent case against central-bank independence: that at the zero lower bound (and especially when banking systems are in trouble) the central bank needs fiscal help to get the transmission mechanism operating. But is it right? 

When I look at the Fed, for instance, I see three possible ways in which the "foolproof way" has failed to win support. One is an intellectual failure: central bankers may have learned and even supported the foolproof strategy when applied on other economies or in other time periods, but when the solution is put to them as policymakers they are reluctant to abandon inflation targeting, presumably because they perceive the gains to low and stable inflation to be so substantial. In this case, the problem with the foolproof method is that it has not been tried. 

A second possibility is that the Fed has in fact done quite a lot to signal to markets that inflation expectations should be higher. But it has failed to raise inflation expectations much above 2% because of the credibility it has earned as an inflation fighter and the time inconsistency problem mentioned by Mr Crafts. In this case a reduction in political independence may improve central bank policy. 

But a third possibility is that the central bank recognises and would like to try the foolproof strategy but feels constrained by the government, presumably because there is a strong domestic political constituency against higher inflation. In an older population, for example, where the old are generally net creditors and more politically active than young debtors, resistence to higher inflation could be strong. In this case the problem is that the central bank isn't politically independent enough. 

I don't know which problem afflicts which economies. I would have said that Japan falls into the third category; perhaps it did until something—a destabilising catastrophe for example—disturbed that equilibrium. I do appreciate Mr Crafts' reminder that we know how to escape our current doldrums, or used to at any rate.

Which Textbook Is That, Exactly? by Krugman

Iron Man, Iron man/
Does whatever an Iron can/
Makes a crease/
Any size/
Flattens wrinkles/
Smooths out flies/
Look out!/
Here comes the Iron Man.

via Kieran Healy

Escaping liquidity traps: Lessons from the UK’s 1930s escape by Nicholas Crafts

Nevillenomics by Krugman

Nicholas Crafts has a really interesting piece about UK economic policy in the 1930s. The gist is that monetary policy drove recovery through the expectations channel; the Bank of England managed to credibly promise to be irresponsible, that is, to generate inflation. 

But how did they do that? Crafts argues that it was two things: the BoE was not independent, it was just an arm of the Treasury, and the Treasury had a known need to generate some inflation to bring down high debt levels. 

This is very closely related to Gauti Eggertsson’s analysis of Japanese policy(pdf) over the same period: there too the lack of central bank independence combined with a fiscal imperative made it possible to change monetary expectations in an unorthodox way, which was exactly what was needed (although they should have skipped the invading Manchuria part). 

All of this reinforces the important point that, as I put it early in this crisis, we’ve entered a looking-glass world in which virtue is vice and prudence is folly, and in which doing the responsible thing is a recipe for economic failure. 

And it also bodes surprisingly well for Abenomics, which might work in part precisely because of what everyone imagines to be Japan’s biggest problem, its huge public debt.

The Facts Are In and Paul Ryan Is Wrong by Jonathan Chait

(via DeLong)

AV Club reviews "Parts Developed In An Unusual Manner" from Orphan Black

Timely mention of Thatcher-era Britain and the Brixton riots in the context of Sarah's youth. Ding dong the witch is dead! Rust in Peace, Iron Lady.

labor rigidities [sic]

Low Unemployment in Germany: The Story Is Not GDP Growth by Dean Baker

Floyd Norris has a good piece today comparing trends in unemployment rates across countries in the downturn. He notes that Germany alone has seen a drop in its unemployment rate since the downturn began. While he notes that Germany has pursued work sharing policies that have encouraged employers to keep workers on the job working shorter hours, readers may not appreciate the full importance of this policy. 

Growth in Germany and the United States have been virtually identical since the beginning of the downturn. While Germany has a large balance of trade surplus, in contrast to the deficit in the United States, its consumption growth has been weaker.



Source: International Monetary Fund.

Germany is helped in this story by the fact that it has a slower rate of labor force growth, but clearly the difference in growth rates does not explain the fact Germany's unemployment rate has fallen by 2.5 percentage points while unemployment in the United States has risen by 3.0 percentage points.

Emperor has no clothes

Wow what a week. This story in the New York Times by Jackie Calmes really struck me:

Economists See Deficit Emphasis as Impeding Recovery

When the emphasis has been the Deficit and government spending since 2010 thanks to Geithner, Obama, and the Tea Party. It's as if the boy yelled "The emporer has no clothes."

And DeLong on Moby Ben and Washington-Whale.

Powerful shit. About the hedge fund cranks (DeLong mentions in a comment that conservative economists like Marty Feldstein feel the same way.)

BERNANKE-HATERS AT THE SOHN CONFERENCE by DeLong

And Matthew Yglesias:

Hedge fund Bernanke hate: A lot of folks have remarked on the amazing outpouring of hatred for Ben Bernanke's allegedly inflationary monetary policies from the hedge fund set at the recent Sohn Conference, but I don't think anyone's really nailed it. Here's the thing about rich hedge fund guys. They're people. And like other people you may have met, they like money and don't like paying taxes. Where rich people are different is that they have a lot of money, so it's really tempting to say "hey lets take that money and give it to people who need the money more."

Rich people who don't like paying taxes don't like the idea of macroeconomic stabilization policy. That's because it'd convenient for them if the market economy could be not just a practical tool for allocating goods, but an moral framework imbued with deep ethical significance.

And that, in turn, is an idea that sits oddly with the concept that actually you have a bunch of bureaucrats in the Federal Reserve System making the economy plug along. So rich guys indulge fantasies of shifting back to a gold standard or something else that would restore divine right to the monetary system. But beyond that, the central banker they like best is the central banker who's most obscure. Conventional monetary policy was something economists and bond traders paid attention to, but nobody else. Alan Greenspan raising or cutting rates by 25 basis points wasn't a big spectacle. Since the easing (or tightening) was based on interest-rate targeting rather than quantitative monetary creation, you didn't get articles about "printing money". It was all just there in the background.

Ben Bernanke is as if the Wizard of Oz stepped forward from behind the curtain and turned out to be a really powerful wizard. The whole market economy turns out to be an elaborately orchestrated affair, with deep involvement by government central planners who weigh a variety of situations before determining outcomes. In that kind of world, there may still be reasons to eschew certain kinds of tax hikes. But they're practical, pragmatic reasons. They're not moral reasons, in which taxes violate the natural hierarchy of the market because there clearly is no such hierarchy.

Time magazine lists Yglesias as one of 2013's best political Twitterers along with Franke-Ruta. Zero Hedge is listed for economics! WHY Zero Hedge??? Is Time trying to be seen as edgy? So Zero Hedge criticizes the banks, so what?

http://en.wikipedia.org/wiki/Excess_reserves

"On October 3, 2008, Section 128 of the Emergency Economic Stabilization Act of 2008 allowed the Fed to begin paying interest on excess reserve balances ("IOER") as well as required reserves. They began doing so three days later.^[3] Banks had already begun increasing the amount of their money on deposit with the Fed at the beginning of September, up from about $10 billion total at the end of August, 2008, to $880 billion by the end of the second week of January, 2009.^[4][5] In comparison, the increase in reserve balances reached only $65 billion after September 11, 2001 before falling back to normal levels within a month. Former U.S. Treasury Secretary Henry Paulson's original bailout proposal under which the government would acquire up to $700 billion worth of mortgage-backed securities contained no provision to begin paying interest on reserve balances.^[6]

The day before the change was announced, on October 7, Fed Chairman Ben Bernanke expressed some confusion about it, saying, "We're not quite sure what we have to pay in order to get the market rate, which includes some credit risk, up to the target. We're going to experiment with this and try to find what the right spread is."^[7] The Fed adjusted the rate on October 22, after the initial rate they set October 6 failed to keep the benchmark U.S. overnight interest rate close to their policy target,^[7][8] and again on November 5 for the same reason.^[9]

The Congressional Budget Office estimated that payment of interest on reserve balances would cost the American taxpayers about one tenth of the present 0.25% interest rate on $800 billion in deposits:

Estimated Budgetary Effects^[10]

Year	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
Millions of dollars	0	-192	-192	-202	-212	-221	-242	-253	-266	-293	-308
(Negative numbers represent expenditures; losses in revenue not included.)

0.25% simple interest on $800 billion is $2 billion, not $202 million [LOLWUT???] as shown for 2009. But those expenditures pale in comparison to the lost tax revenues worldwide resulting from decreased economic activity from damage to the short-term commercial paper and associated credit markets."

The government depositing money in the primary dealers accounts is sort of like a Government Jobs Program. Just takes a while for jobs to be created from credit loaned out from the banks.

At the end of January, 2009, excess reserve balances at the Fed stood at $793 billion[18] but less than two weeks later on February 11, total reserve balances had fallen to $603 billion. On April 1, reserve balances had again increased to $806 billion. By August 2011, they had reached $1.6 trillion.[19] 

On March 20, 2013, excess reserves stood at $1.76 trillion.[19] As the economy began to show signs of recovery in 2013, the Fed began to worry about the public relations problem that paying dozens of billions of dollars in IOER would cause when interest rates rise. St. Louis Fed president James B. Bullard said, "paying them something of the order of $50 billion [is] more than the entire profits of the largest banks." Bankers quoted in the Financial Times said the Fed could increase IOER rates more slowly than benchmark Fed funds rates, and reserves should be shifted out of the Fed and lent out by banks as the economy improves. Foreign banks have also steeply increased their excess reserves at the Fed which the Financial Times said could aggravate the Fed’s PR problem.

Reinhart-Rogoff One More Time: Why the 90 Percent Never Should Have Been Taken Seriously by Dean Baker

In effect, Reinhart and Rogoff were making the same sort of claim about debt and GDP. Let me try to explain this in a way that even an economist can understand it. 

I have often pointed out that the value of long-term debt fluctuates with the interest rate. I didn't think this is a secret, but apparently few economists have followed what happens to bond prices when interest rates change. The point is that the value of our debt will plummet if interest rates rise, as the Congressional Budget Office and other forecasters expect. This means that we could buy back long-term debt issued today at interest rates of less than 2.0 percent for discounts of 30-40 percent. This would sharply reduce our debt-to-GDP ratio at zero cost.

Yes, this is really stupid, but if you believed the Reinhart-Rogoff 90 percent debt cliff, then you believe that we can sharply raise growth rates by buying back long-term bonds at a discount. It's logic folks, it's not a debatable point -- think it through until you understand it.

So, interest rates rise. A 30-year Treasury loses value, going from 2 percent interest to 5 percent interest, and from the price of 188 to 115. What happens when the Fed buys the debt back?

Is it an open market operation?

http://en.wikipedia.org/wiki/Open_market_operations

Since most money now exists in the form of electronic records rather than in the form of paper, open market operations are conducted simply by electronically increasing or decreasing (crediting or debiting) the amount of base money that a bank has in its reserve account at the central bank. 

...

In the United States, as of 2006, the Federal Reserve sets an interest rate target for the Federal funds (overnight bank reserves) market. When the actual Federal funds rate is higher than the target, the New York Reserve Bank will usually increase the money supply via a repo (effectively borrowing from the dealers' perspective; lending for the Reserve Bank). When the actual Federal funds rate is less than the target, the Bank will usually decrease the money supply via a reverse repo (effectively lending from the dealers' perspective; borrowing for the Reserve Bank). 

In the U.S., the Federal Reserve most commonly uses overnight repurchase agreements (repos) to temporarily create money, or reverse repos to temporarily destroy money, which offset temporary changes in the level of bank reserves.[4] The Federal Reserve also makes outright purchases and sales of securities through the System Open Market Account (SOMA) with its manager over the Trading Desk at the New York Reserve Bank. The trade of securities in the SOMA changes the balance of bank reserves, which also affects short term interest rates. The SOMA manager is responsible for trades that result in a short term interest rate near the target rate set by the Federal Open Market Committee (FOMC), or create money by the outright purchase of securities.[5] More rarely will it permanently destroy money by the outright sale of securities. These trades are made with a group of about 22 (currently 18 as an immediate aftermath of 08/09 credit crisis) banks or bond dealers that are called primary dealers. 

Money is created or destroyed by changing the reserve account of the bank with the Federal Reserve. The Federal Reserve has conducted open market operations in this manner since the 1920s, through the Open Market Desk at the Federal Reserve Bank of New York, under the direction of the Federal Open Market Committee. The open market operation is also a means through which inflation can be controlled because when treasury bills are sold to commercial banks these banks can no longer give out loans to the public for the period and therefore money is being reduced from circulation.

 http://en.wikipedia.org/wiki/Primary_dealers

As of October 31, 2011 according to the Federal Reserve Bank of New York the list includes:^[10]

• Scotiabank Global Banking and Markets
• BMO Capital Markets Corp.
• BNP Paribas Securities Corp.
• Barclays Capital Inc.
• Cantor Fitzgerald & Co.
• Citigroup Global Markets Inc.
• Credit Suisse Securities (USA) LLC
• Daiwa Capital Markets America Inc.
• Deutsche Bank Securities Inc.
• Goldman, Sachs & Co.
• HSBC Securities (USA) Inc.
• Jefferies & Company Inc.
• J.P. Morgan Securities LLC
• Merrill Lynch, Pierce, Fenner & Smith Incorporated
• Mizuho Securities USA Inc.
• Morgan Stanley & Co. Incorporated
• Nomura Securities International Inc.
• RBC Capital Markets, LLC
• RBS Securities Inc.
• SG Americas Securities LLC.
• UBS Securities LLC.

The New York Fed has a list of changes since 1999.

So they're part of the system and get free money deposited to their accounts when the Fed wants to create jobs. They get money pulled from their accounts when labor markets are "too tight" and workers are able to bid up their wages.

Employers: Never Bid Up Wages (bias in the media and with economists)

It's So Hard to Find Good Help: Businessweek Edition by Dean Baker

Businessweek tells us that homebuilders would be building more homes, if only they could find qualified construction workers. Hmmm, that must mean that wages for construction workers are soaring as the shortage causes employers to bid up wages in an effort to grab workers away from competitors or hold on to their current workforce.

That's not what the data say. According to data from the Bureau of Labor Statistics, after adjusting for inflation the average hourly wage in construction has risen by just 0.9 percent in the five years from 2007 to 2012. Note that this a total increase of 0.9 percent over these five years, not an annual increase. If there is a labor shortage, it's not showing up in wages for some reason. (Of course the unemployment rate for construction workers was reported at 13.2 percent in April, which also does not seem to indicate a labor shortage.)

The more obvious explanation for the fact that construction remains depressed is thenear record vacancy rates. Presumably many of these empty homes will have to be filled before builders get more aggressive about building new ones.

Zero Hedge one of Time's best Twitter feed's? What?!?

Yglesias and Franke-Ruta were listed in Time's best political Twitter feeds!

Found these at Time's website looking for:

The Housing Mirage by Rana Faroohar

But perhaps the biggest takeaway from the current housing "boom" is that the conventional wisdom no longer holds. It has long been said that you can't have a sustainable economic recovery in the U.S. until the housing market is back. In truth, it may be the other way around. Until you have more jobs, rising wages and a middle class that can afford to take out a mortgage from a bank that will actually lend to it, you can't have a real housing recovery.

Also:

Every Every Every Generation Has Been the Me Me Me Generation by Elle Reeve

(via Atrios & Scott Lemieux)

'In Praise of Econowonkery' by Mark Thoma

In the comment section, I did a link dump about the floor system safe asset paradigm shift genealogy.

The Widowmaker

MOBY BEN, OR, THE WASHINGTON SUPER-WHALE: HEDGE FUNDIES, THE FEDERAL RESERVE, AND BERNANKE-HATRED by DeLong

From my perspective, of course, the hedge fundies' analogy between the London Whale and the Washington Super-Whale is all wrong--the hedge fundies are thinking partial-equilibrium when they should be thinking general equilibrium. CDX IG 9 has a well-defined fundamental value: the payouts should each of the 125 companies go bankrupt times the chance that they will. What Bruno Iksil does does not affect that fundamental value. He can bet, and drive the price, but he cannot change the fundamental.

But the Washington Super-Whale is different.

In a healthy economy, the Ten-Year Treasury Bond does have a well-defined fundamental. When the economy is healthy enough that pricing power reverts to workers and keeping inflation from rising is job #1 for the Federal Reserve, the level of the Federal Funds rate now and in the future is pinned down by the requirement to hit the inflation target. And the fundamental of the Ten-Year Treasury Bond is then the expected value over the bond's lifetime of the future Federal Funds rate plus the appropriate ex ante duration risk premium.

But when the economy is depressed, like now? When market appetite for short-term cash at a zero interest rate is unlimited, like now? When workers have no pricing power, and so wage inflation is subdued, like now? The Federal Reserve is not J.P. Morgan Chase. It is not a highly-leveraged financial institution that must worry about holding too much duration risk. As Glenn Rudebusch once said: "Our business model here at the Fed is simple: (i) print reserve deposits that cost us 0 (OK. 0.25%/yer), (2) invest them in interest-paying bonds that we then hold to maturity, (3) PROFIT!!" And the more quantitative easing the Fed undertakes and the larger is its balance sheet the larger is the amount of money the Federal Reserve makes on its portfolio, without running any risks--as long as the economy remains depressed.

The Federal Reserve, you see, is unlike J.P. Morgan Chase: the Federal Reserve does print money.

Harpooning Ben Bernanke by Krugman

I’d riff on this a bit further. I suspect that the hedge fund guys are relying a lot on historical correlations that worked pretty well for decades: mean reversion of yields, correlations with deficits, etc., most of it pretty much model-free. The trouble is that a once-in-three-generations deleveraging shock makes such correlations useless. Cross-national analogies — i.e., Japan — would have been better, but don’t seem to have been applied. 

What you should be doing is macro analysis, using something like IS-LM — something like what I did here, almost three years ago. (The forecasts have gotten worse since, so the implied long-term rate would be even lower). 

But instead of saying that maybe this macro IS-LM stuff has a point, they’re raging against the man with the beard.

Pro-Inflation Policies Show Signs of Helping Japanese Economy

The key, economists say, lies in how much exporters will pass on their bigger profits to consumers, by raising wages or hiring new workers. Higher incomes would drive a much-needed recovery in consumption, bringing about a virtuous cycle of rising prices, profits, investment and even higher incomes. 

Mr. Abe himself has been publicly pressuring corporate executives to raise pay, declaring on television last month that companies needed to “return favorable corporate earnings to their workers,” prompting a string of companies to declare wage increases or extra bonuses in recent months.

Land of the Rising Sums by Krugman

LOLCAT SEZ: WHEN UR INFLATION BELOW AND UR UNEMPLOYMENT CONSISTENTLY ABOVE TARGET, UR DOIN IT WRONG by DeLong

Obi-Wan Bernanke waves his hand and performs a Jedi Mind Trick on the press and public, "The economic recovery has been unsatisfactory. We stand ready to do more if necessary."

"These aren't the droids you're looking for."

Liberal Wonk Blogging Could Be Your Life by Mike Konczal

Gerwig and Marling

The other side of summer: A preview of the season’s non-blockbuster movies by the AV Club

I liked Gerwig in Greenberg and Whit Stillman's Damsels in Distress. Stillman's Barcelona is one of my favorite movies of all time.  Looking up info on Marling, I learned that was her in Redford's "The Company You Keep" which was about the Weather Underground, another radical group.

The Moral Equivalent of Space Aliens by Krugman

David Pilling , writing in the FT, suggests that it was the double shock of the 2011 tsunami and China’s overtaking of Japan as the number 2 economy by market value. These shocks, he argues, broke through the fatalism and convinced the Japanese elite that something must be done.

Economists See Deficit Emphasis as Impeding Recovery by Jackie Calmes and Jonathan Weisman

Surpise from Krugman

WHEN BIG DOGS GO BAD by Charles Pierce

linked to by Krugman:

The Fix the Debt Fix Is Still In

Who seemed to argue you vote Democratic and defend Clinton no matter what, sort of, in the previous blog post:

South Carolina Voters Get It

So it's good to see Krugman criticize Clinton here (who did criticize Krugman). This is why I was for Obama over Hillary. Krugman wanted Hillary.

Fed Watch: 14,000 by Tim Duy

Fed Watch: When Deficits Become a Problem by Tim Duy

JW Mason comments:

I'm afraid Tim Duy is wrong, Randy Wray is right, and Krugman is contradicting himself.

It is one thing to say that the **flow** of demand for current output caused by large deficits can be inflationary. It is a different thing entirely to say that the **stock** of debt is an independent constraint on policy or a factor in interest rate determination. 

Yes, if a government spends far more than it collects in taxes, this can lead to aggregate demand aggregate supply constraints, driving up prices. MMT has always said this. But what matters is the size of the output gap. The relationship between the government budget balance, the output gap and inflation is exactly the same whether the debt-GDP ratio is 20% or 200%.

I don't know what to make of this. Mason is a smart guy but I don't understand what he's saying and Duy and Krugman have been wrong before.

But I don't trust the MMTers! Intellectual snake oil salesman with dodgy rhetoric about how deficits don't matter and claims that they never said that.

What is Mason saying? That the limit is set by how much in taxes the government is able to collect?

Unexpected inflation is in effect sort of hidden surprise tax increase in that it devalues the contracts creditors hold from when they originally drew up the the debt contract.

Likewise an extremely slack labor market is in effect a tax on workers in that it weakens their bargaining power and enhance the "threat of the sack."

See Michal Kalecki.

when the far left agree with the rightwing

Atrios - Obamacare skeptic - links to Greg Sargent.

The Morning Plum: Dems shouldn’t take GOP’s bait on Obamacare implementation by Greg Sargent

Sargent is right that Obama passed health care reform and was re-elected despite the public's anxiety of it and in general. 

For one thing, as Josh Barro has noted, implementation is likely to be most keenly felt among those who currently lack insurance, who will naturally see getting insurance as a preferable outcome to nothing at all, even if proves logistically difficult.

 More people will be covered. This will make them healthier and less anxious.

The quid pro quo was that young people be forced to buy coverage. This will give money to the insurance companies who are now forced to cover everyone, even people with pre-existing conditions. Plus young people can stay on their parents' plan until they are 26.

Obama care is also a very VERY tentative step towards a single payer system, in that it sets up exchanges in states, gives subsidies to help pay for health care and enacts studies to see how cost can be held down and things can be improved.

Better branding than the "dismal science"

KEYNESIAN ECONOMICS: THE GAY SCIENCE? by DeLong

Economics 101 for WAPO: Supply and Demand in the Labor Market by Dean Baker

Economists generally like to see supply and demand determine prices. When there is a shortage of an item then the price is supposed to rise. At higher prices the supply increases and the demand falls, this eliminates the shortage.

For some reason this simple logic was altogether absent from a Washington Post article that was headlined "Germany struggles with skilled labor shortage, shrinking population." Remarkably the piece never once mentions increasing wages. Instead it talks about efforts to bring in foreign workers.

It seems like Germany might be suffering from the same problem that is often the subject of news stories in the United States: managers who don't know how to raise wages. The media have frequently reported on businesses who complain that they cannot find qualified workers. 

Since there are very few occupations where real wages have been rising in the last five years, it seems that few people who run businesses understand how labor markets work. This suggests that there could be large gains to the economy if the government (both here and in Germany) offered remedial economic courses to business managers explaining the basics of labor markets. Then they would understand that if they want more workers they should offer higher wages. This would eliminate labor shortages and then we would no longer have to read silly pieces like this one in the Post.

AV Club reviews "The Climb" from Game of Thrones (for experts)

AV Club reviews "The Climb" from Game of Thrones (for newbies)

AV Club reviews "Variations Under Domestication" from Orphan Black.

Where Have All the Jobs Gone? by Jared Bernstein

How to State the Keynesian Argument Correctly by Yglesias

Employment is determined by the demand for it from the government and private (domestic + exports). Credit conditions set by the Central Bank can modulate demand, turning it up or down depending on inflationary/deflationary pressures. As can fiscal policy. 

The limits of it are set by the supply of employable. When there's an oversupply your going to get low inflation and a lower employed-to-population ratio compared to the 2000s and long term trend. 

Part of it as Bernstein states is that we've had a trade deficit for years. This can be replaced by fiscal (deficits) and monetary policy. A lower currency value will eliminate the deficit and raise employment from exports.

Game of Thrones

Brienne put his age at ten, but she was terrible at judging how old a child was. She always thought they were younger than they were, perhaps because she had always been big for her age. Feakish big, Septa Roselle used to say, and mannish. "This road is too dangerous for a boy alone."

"Not for a squire. I'm his squire. The Hand's squire."

"Lord Tywin?" Brienne sheathed her blade.

"No. Not that Hand. The one before. His son. I fought with him in the battle. I shouted 'Halfman! Halfman!'"

The Imp's squire. Brienne had not even known he had one. Tyrion Lannister was no knight. He might have been expected to have a serving boy or two attend him, she supposed, a page and a cupbearer, someone to help dress him. But a squire? "Why are you stalking me?" she said. "What do you want?"

 "To find her." The boy got to his feet. "His lady." You're looking for her. Brella told me. She's his wife. Not Brella, Lady Sansa. So I thought, if you found her..." His face twisted in sudden anguish. "I'm his squire," he repeated, as the rain ran down his face, "but he left me."

-- George R.R. Martin, A Feast for Crows 

Suicide rates rise sharply in U.S.

From 1999 to 2010, the suicide rate among Americans ages 35 to 64 rose by nearly 30 percent, to 17.6 deaths per 100,000 people, up from 13.7. Although suicide rates are growing among both middle-aged men and women, far more men take their own lives. The suicide rate for middle-aged men was 27.3 deaths per 100,000, while for women it was 8.1 deaths per 100,000. 

The most pronounced increases were seen among men in their 50s, a group in which suicide rates jumped by nearly 50 percent, to about 30 per 100,000. For women, the largest increase was seen in those ages 60 to 64, among whom rates increased by nearly 60 percent, to 7.0 per 100,000.

...

The rise in suicides may also stem from the economic downturn over the past decade. Historically, suicide rates rise during times of financial stress and economic setbacks. “The increase does coincide with a decrease in financial standing for a lot of families over the same time period,” Dr. Arias said.

Another factor may be the widespread availability of opioid drugs like OxyContin and oxycodone, which can be particularly deadly in large doses.

Although most suicides are still committed using firearms, officials said there was a marked increase in poisoning deaths, which include intentional overdoses of prescription drugs, and hangings. Poisoning deaths were up 24 percent over all during the 10-year period and hangings were up 81 percent.

Dr. Arias noted that the higher suicide rates might be due to a series of life and financial circumstances that are unique to the baby boomer generation. Men and women in that age group are often coping with the stress of caring for aging parents while still providing financial and emotional support to adult children.

But you know we need the sequester and to cut government spending in a liquidity trap, for the sake of the children and future generations .... whose parents and loved ones are killing themselves.

this weird Canadian science fiction renaissance

AV Club review of Orphan Black's pilot

The series is also a part of this weird Canadian science fiction renaissance we’re in right now. Fellow members include Lost Girl and Continuum, and like both of those shows, the low-budget production values will be a deal-breaker for some. (The show is so low-budget that there are few—if any—times when Maslany shares the screen with herself, seemingly a prerequisite for a series about people who look identical to each other.) But for those who can look past the low budget and get over their fears about how on Earth this could possibly be a long-running series instead of a miniseries, there’s so much fun to be had in the depths of Orphan Black’s labyrinthine plotting and endless forward momentum, and there’s even more fun to be had watching the young woman at its center make her way through the maze.

Exit Strategy (ramblings)

I believe the last two times the Fed raised rates it did cause problems. In the early 90s you had the Mexican-peso crisis when the Fed raised rates. I'm less clear about the 2000s. They did raise rates but seems like the bubble had run its course and we had a Minsky moment.

I think Krugman made a good point in his recent column* about how the discussion of blowing the bubble is overblown when countercyclical policy to close the output gap has been so lacking.

But for some reason I'm less worried about the Fed's exit strategy this time around. They'll say they'll raise the interest rates on excess reserves (IOER) giving more of a subsidy to the banks, who investors don't trust anymore. (The cash nexus dissolves all bonds of trust into air.)

I'm more worried that we're turning Japanese and will NEVER recover given the governments poor demand management on the monetary and fiscal fronts. Senseless deficit cutting and fears of inflation. But there is hope across the sea with Abenomics and the general sense the economy will always turn around as people forget about the housing bubble and financial crisis and it all starts over again. But maybe that won't happen.

--------------------
* "Why did spending plunge? Mainly because of a burst housing bubble and an overhang of private-sector debt — but if you ask me, people talk too much about what went wrong during the boom years and not enough about what we should be doing now. For no matter how lurid the excesses of the past, there’s no good reason that we should pay for them with year after year of mass unemployment."

May Day: Should We All Become Marxists? by Yglesias

AV Club reviews "The Colonel" from "The Americans"

Happy May Day

The Americans season finale tonight.

Wikipedia entry on May Day

It's a 401(k) World and It Basically Sucks by Yglesias

Orphan Black

Great show on BBC America.

I watched the first episode and was impressed. Felix, Sarah's foster brother and confidante is classic!

The mother of invention by Steve Randy Waldman

Game of Thrones, Season 3: How awful is it to be born a Lannister? Pretty awful. By Tracey Coronado and Rachael Larimore

But as Tyrion tell Jon Snow about Bran, it's better to be a rich cripple than a poor one.

economist couple join Hamilton

Reinhart and Rogoff #61,346: Stevenson and Wolfers Edition by Dean Baker

AV Club reviews "Kissed by Fire" from Game of Thrones (experts)

AV Club reviews "Kissed by Fire" from Game of Thrones (newbies)

conservatives and Republicans are liars

Public and Private Sector Payroll Jobs: Bush and Obama

The public sector grew during Mr. Bush's term (up 1,748,000 jobs), but the public sector has declined since Obama took office (down 718,000 jobs). These job losses have mostly been at the state and local level, but they are still a significant drag on overall employment.

Can the Fed offset contractionary fiscal policy? by Ryan Avent

Monetarism Falls Short (Somewhat Wonkish) by Krugman

Washington Post Editorial Condemns Austerity in Europe! by Dean Baker

I double-checked to see that this is in fact April 28 and not April 1. This does seem to be real, a Washington Post lead editorial on Europe that calls for Germany to ease up on austerity and to allow the peripheral euro zone countries to grow again. 

I could nit-pick and point out that the editorial doesn't get everything right (nothing wrong with Germany running trade surpluses, if the surpluses were with fast-growing countries in the developing world), but we should just sit back and enjoy this one for a moment. Perhaps evidence and logic can actually have an impact on economic policy debates, even at the Washington Post.