Spoilers

Towards the end of book five of A Song of Ice and Fire, Jon Connington, Prince Aegon Targaryen, and the Golden Company have returned to Westeros and taken the castle of Griffin's Roost on the Cape of Wrath near Storm's End. Haldon the Halfmaester has been looking over parchments in the maester's tower to learn what is the state of the game in Westeros. Connington asks him

"Have those parchments told you anything of use?"

"Oh, much and more, my lord." Haldon gave him a thin smile. "The Lannisters make enemies easily but seem to have a harder time keeping friends. Their alliance with the Tyrells is fraying, to judge from what I read here. Queen Cersei and Queen Margaery are fighting over the little king like two bitches with a chicken bone, and both have been accused of treason and debauchery. Mace Tyrell has abandoned his siege of Storm's End to march back to King's Landing and save his daughter, leaving only a token force behind to keep Stannis's men penned up inside the castle."

Connington sat. "Tell me more."

"In the north the Lannisters are relying on the Boltons and in the riverlands upon the Freys, both houses long renowned for treachery and cruelty. Lord Stannis Baratheon remains in open rebellion and the ironborn of the islands have raise up a king as well. No one ever seems to mention the Vale, which suggests to me that the Arryns have taken no part in any of this."

George R.R. Martin, "A Dance With Dragons,"  page 808

We Just Had the Lowest Core Inflation in 50 Years. What Does This Mean for "Expectations" and Monetary Policy? by Mike Konczal

Last Friday, the BEA announced the lowest year-over-year rise in core inflation it has ever recorded. The year-over-year PCE core inflation, or inflation stripped of volatile energy and food prices, was 1.05 percent. As Doug Short notes, the previous all-time low was 1.06, and that is from March 1963. (The records go back to 1959.) Inflation is collapsing in 2013, both for observed values and future expectations. This is noteworthy because, as you may remember, the Federal Reserve took extraordinary actions at the end of last year to hit its inflation target.

the urge to purge

Austerians, deficit scolds, Mellonheads, the sequester, Pete Peterson, Ren & Stimpy.

Wow, Susan Rice for National Security Adviser and Samantha Power for ambassador to the UN.

And three nominations to the DC Circuit Court.

It Isn't Trade Deals That Prevent the Obama Administration from Lowering the Value of the Dollar by Dean Baker

Harold Meyerson has an interesting column warning of conditions that are likely to be in the Trans-Pacific Partnership. However it is misleading in one important respect.

At one point the article notes efforts by Senator Sherrod Brown to require rules that will the United States to retaliate against currency "manipulators," countries that deliberately prop up the value of the dollar against their own currency in order to increase their trade surplus. This is misleading because the United States already has this authority (see this piece, for example) and under almost any conceivable set of circumstances will possess ample means to force down the value of the dollar relative to other currencies.

The reason that the United States runs an over-valued currency, placing U.S. goods and services at a competitive disadvantage, is that powerful interest groups profit from having an over-valued currency. Retailers like Walmart have spent large amounts of money setting up low-cost supply chains in China and other developing countries. This is an important source of their advantage over smaller competitors. They are not anxious to see this advantage eroded by a fall in the value of the dollar.

Similarly, large manufacturers like GE have much of their production overseas. These companies also do not want to see their profits eroded by a fall in the value of the dollar. Major financial companies like Goldman Sachs and JP Morgan also tend to favor a high dollar since it means that their money goes further elsewhere in the world and it minimizes the risk of inflation in the United States.

These and other powerful domestic interests are the main reason that the United States does not take steps to reduce the value of the dollar and bring the trade deficit closer to balance. It is misleading to imply that the problem is trade agreements that prevent the Obama administration from acting.

Note -- "rise" was changed to "fall" in 3rd paragraph, thanks David H.

Why Game Of Thrones’ Red Wedding packs such an emotional impact by Tasha Robinson

I really loved Michelle Fairley, and Richard Madden was good too. I disagree with the whole macho "Starks were dumb" meme. They made mistakes sure, but they were unlucky.

To me it's smacks of blaming the victims.

The Fed, Inequality and Accounting Identities by Dean Baker

However, a little income accounting here would go along way in helping this discussion. The country has an output gap of around 6 percent of GDP. This is due to the plunge in residential construction following the collapse of the housing bubble and also the lost consumption that resulted from the loss of $8 trillion in housing equity. Standard measures of the housing wealth effect imply that a reduction of $400 billion to $560 billion in annual consumption. 

There are a limited number of channels to fill this lost demand and thereby make up the 9 million jobs deficit we now face. One route is large government deficits, either from increased spending or tax cuts. That is probably the quickest and surest way to make up the demand gap, but the Serious People insist that we can't run large deficits. 

Another obvious route, and probably the best long-term solution, is to get the dollar down. This will improve the international competitiveness of U.S. goods and bring the trade deficit closer to balance. Unfortunately this has not been a high priority for the Obama administration. There are powerful interests like Walmart, many large manufacturers, and the financial sector which benefit from an over-valued dollar. As a result, getting the dollar back to a more sustainable level has not been a priority for the administration. 

When these routes are excluded there are not many other options to increase growth and create jobs. Low interest rates will help by allowing homeowners to refinance their mortgages and free up money for other spending. However this effect will be limited. Even if all $8 trillion in mortgage debt were refinanced at a 1.0 percentage point lower interest rate that would only free up $80 billion. And, this is offset by the fact that those lending the money will have less to spend.

Reality-Based

Ben Bernanke’s surprisingly excellent, radical speech by Ezra Klein and Evan Soltas

Ben Bernanke Demolishes Meritocracy and Shows Us All Why We Should Eagerly Await Professor Bernanke's Return by Yglesias

Ben Bernanke Endorses A 73 Percent Tax Rate by Krugman

rose-colored glasses

Larry Summers Still Hasn't Heard About the Stock Bubble by Dean Baker

It looks like more trouble with Harvard economists (e.g. Reinhart-Rogoff). It seems Larry Summers, who was Treasury Secretary in the last two years of the Clinton administration, is still unaware of the stock bubble that propelled growth in those years.
In a Post column today he tells readers: 

"As a consequence of policy steps in 1990, 1993 and 1997 [deficit reduction measures], it was possible by 2000 for the Treasury to retire federal debt. Deficit reduction and the associated reduction in capital costs and increase in investment were important contributors to the nation’s strong economic performance during the 1990s, when productivity growth soared and unemployment fell below 4 percent. We enjoyed a virtuous circle in which reduced deficits led to lower capital costs and increased confidence, which led to more rapid growth, which further reduced deficits." 

Of course the reason that the country was repaying debt was that a $10 trillion stock bubble led to an investment boom (much of it in junk dot.com investment) and a much larger consumption boom through the stock wealth effect. This bubble fueled the strong growth at the end of the 1990s. 

While the growth and resulting low unemployment rate were great news, bubbles are inherently unsustainable. This bubble burst beginning in 2000 and led to the recession of 2001. It is difficult to recover from a recession caused by a bursting bubble. The economy did not begin to create jobs following the 2001 recession until September of 2003. It did not make up the jobs lost in the downturn until January of 2005. Until the current downturn this was the longest period without job growth since the Great Depression. 

The demand from the stock bubble was necessary to support the economy as a result of large trade deficit the country was running at the time. Robert Rubin, Larry Summers' predecessor as Treasury Secretary, pushed a strong dollar policy. He put force behind this policy with his control of the IMF's bailout from the East Asian financial crisis. The sharp run-up in the value of the dollar over these years made U.S. goods uncompetitive in the world economy leading to a sharp rise in the trade deficit. The deficit eventually peaked at 6.0 percent of GDP in 2005. The demand from the stock bubble and later the housing bubble were needed to offset the demand lost due to the trade deficit. 

It is remarkable that Summers does not seem to be aware of this history, but I guess economics at Harvard is different from economics elsewhere in the world.

AV Club review of "The Rains of Castamere" (newbies) from Game of Thrones

AV Club review of "The Rains of Castamere" (experts) from Game of Thrones

Patent trolls

Health Care Costs: Don't Blame the Free Market by Dean Baker

Perhaps more importantly, it grants patent monopolies to drugs and medical devices. These monopolies allow pharmaceutical companies and manufacturers of medical devices to charge prices that are many thousand percent above their free market price. Not only does this raise the cost for these items it also perversely is likely to lead to unnecessary procedures, like the proliferation of colonoscopies that are a main theme of the piece. 

Because the equipment used in colonoscopies is subject to patent protection, hospitals and other medical facilities are able to charge exorbitant prices. Since colonoscopies provide large profits (which would not be the case in a free market), there is a strong incentive to push their use on patients in circumstances where they may not be needed. 

This is a more general problem in U.S. medicine. Because drug companies can sell drugs for hundreds or even thousands of dollars per prescription, when they can be profitably sold for $5-$10, they have an enormous incentive to mislead the public about the safety and effectiveness of their drugs. 

This is why we regularly see stories about drug companies concealing evidence that their drugs are ineffective or even harmful. That is a direct result of the enormous mark-ups that are provided by patent monopolies. If drugs were sold in a free market these incentives would not exist. 

Patent monopolies are one mechanism to provide an incentive for innovation, however they are a tremendously inefficient mechanism. There are other possible routes for financing innovation (the government already spends $30 billion a year on biomedical research through the National Institutes of Health). 

Of course the industry will fiercely contest any changes that threaten their profits, but no alternatives can even be considered until the public understands the nature of the problem. This piece missed a great opportunity to inform readers.

the grand unified theory

A Sad Story — I Mean, AS-AD Story (Wonkish) by Krugman

As it happens, I’ve thought about this issue quite a lot; it comes up with each revision of Krugman/Wells, where we have to ask whether AS-AD belongs in the exposition. The problem is not that the “real” model is DSGE (New Keynesian theory with intertemporal optimization yada yada); in practice, when it comes to thinking about macro policy Robert Waldmann has it right:

most have gone all the way back to an IS curve (real interest and output) assuming AS doesn’t matter and with the LM curve replaced with something like a Taylor rule. AS if anything, is an adaptive expectations augmented Phillips curve which matters only because of real interest rates, the monetary authority’s response to inflation and debt deflation/inflation.

...

Second — and this plays a surprisingly big role in my own pedagogical thinking — we do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility. Or to put it differently, you do want somehow to make clear the notion (which even fairly Keynesian guys like me share) that money is neutral in the long run. That’s a relatively easy case to make in AS-AD; it raises all kinds of expositional problems if you replace the AD curve with a Taylor rule, which is, as I said, essentially a model of Bernanke’s mind. 

So there is a place for AS-AD, although it’s an awkward one, and the transition to IS curve plus Taylor rule plus Phillips curve, which is the model you really want to use for America right now, is a moment that fills me with dread every time we take it on in a new edition.

The Return of MaxSpeak

Fact versus Fraud, in the words of Krugman

We Are Not Having A Serious Discussion, Obamacare Edition by Krugman

What’s more, this isn’t some obscure issue. When people try to explain the logic of ObamaRomneyCare — certainly when I try to explain it — they often start from precisely this point, pointing out that unregulated insurance markets give the healthy and wealthy a pretty good deal but leave everyone else out in the cold, then work from that point toward the “three-legged stool” of community rating, mandates,and subsidies that supports reform. So Roy has to know that he’s making an essentially fraudulent argument — and does it anyway.

Bringing people, in from the cold is just not a priority.

EVERYTIME SOMEONE MORE-THAN-HALF PERSUADES ME THAT PAUL KRUGMAN REALLY IS TYPICALLY TOO SHRILL TO BE EFFECTIVE... by DeLong

open source versus patent trolls headtrip Orphan Black

AV Club reviews "Endless Forms Most Beautiful" from Orphan Black

Review of book on the Stone Roses

the contradictions of contemporary capitalism and a review of "The East"

Falling for the Anarchy She Was Sent to Fight by A.O. Scott

Back home in Washington, Jane has a scruffy, sensitive, bland boyfriend. Out in the woods, she falls under the spell of Benji (Alexander Skarsgard), who is scruffy, sensitive and dangerous. While the East, being a group of anarchists, has no formal leader, Benji is clearly the alpha dog. His main lieutenants are an elfin zealot named Izzy (Ellen Page) and Doc (Toby Kebbell), a troubled former medical student. All of them come from relatively privileged backgrounds and have painful, intimate reasons for taking up the cause.

I wish Benioff and Weiss would cast Kebbell as Oberyn Martell, the Red Viper of Dorne.

This intimation of large, lurking danger is appropriate to this movie’s vague environmental theme. The damaged, idealistic young people plotting to terrorize the wealthy and comfortable are seen as canaries in the coal mine, their rage a sign that something is terribly wrong. But their animus is also explained in ways that strain credibility and undermine the film’s topicality. Benji, Izzy and Doc are motivated by grief, filial resentment and a desire for revenge. For them the political is personal, which makes it a little less urgent for everybody else. 

But it may be asking too much of “The East” — which is, after all, a twisty, breathless genre film — to wish that it would frame the contradictions of contemporary capitalism more rigorously. The movie is aware that they exist, and wishes that they could be resolved more or less happily, which is hard to argue with, though also hard to believe.

Is Japan a Currency Manipulator? by David Glasner

What’s with Japan? by David Glasner

I'm still hopeful about Abenomics.

Fuck the rich kid, fuck the rich kid, fuck the rich kid

Gaunt

This Time is Not So Different: The Euro Crisis and the 1840s by Carola Binder

Central Banks Act With a New Boldness to Revitalize Economies

Don't Forget the Fed! by Jared Bernstein

Rate Stories by Krugman

THE TRIBAL DISLIKE OF JOHN HICKS AND IS-LM: WEDNESDAY HOISTED FROM THE ARCHIVES FROM 1 1/2 YEARS AGO: HISTORY OF ECONOMIC THOUGHT WEBLOGGING by DeLong

In monetary economics the simplest model is the bare two-good one-period quantity theory of money model:

• There is a peculiar commodity called "money".

• Total economy-wide spending is roughly proportional to it.

There are lots of valid insights to be gained from this model. But does it help us understand the real world today enough to satisfy us? No: the money stock is very large, but the flow of spending is not.
So we complicate the model:

• The incentive to spend money is lower when the short-term safe nominal interest rate is low.

• For each counterfactual level of the money stock there is a curve, with total spending on the horizontal axis and the short-term safe nominal interest rate on the vertical axis, that tells us how the level of spending varies with counterfactual variations in the short-term safe nominal interest rate.

• We call this family of curves--one for each counterfactual level of the money stock--the LM relationship.

• But this is not a complete model: we need to figure out what the short-term safe nominal interest rate is. So we add a bond market to our model and look at its equilibrium level of asset prices to pin down the interest rate.

• We call that pinning-down the interest rate by the name of the IS relationship.

• That is the IS-LM model.

It is a three-good one-period model.

(post-Keynesian?) commenter chris:

John Hicks: IS-LM: An Explanation

I liked Drive, the Nicolas Winding Refn/Gosling collaboration. Their new movie was booed at Cannes. I love the Coen brothers and their new movie Inside Llewyn Davis is said to be their best yet. So I'm excited.

Coincidently, the lead in the Coen's new movie, Oscar Isaac, was in Drive. He played Carey Mulligan's ex-con husband. He has been in Che: Part One, The Bourne Legacy, Body of Lies, Agora, Robin Hood and Sucker Punch.

wherein I take Escaton off the blogroll again

Since Atrios says John McCain is worse than Bashar al-Assad.

Several Hours 

I have no idea what the point of John McCain going to Syria is, though at least now his conspicuous absence from the Sunday shows has been explained. 

I'm sure he's an expert now. 

by Atrios at 17:33

I remember a time when the liberal-left or some of it at least was concerned about humanitarian disasters and the fates of foreigners.  I see the humanitarian disaster in Syria as not just a pre-text for war and as worse than John McCain or the Republicans.

If you just read DeLong, Yglesias, or Krugman you would never know there's an ongoing disaster in Syria which is spreading.

exit strategy (Yoda Kuroda)

Nikkei Sinks Again Amid Mixed Signals From Central Bank

In Tokyo, the minutes of the Bank of Japan’s policy meeting on April 26 revealed a degree of doubt about the bank’s ability to inject a healthy dose of inflation into an economy that has suffered from crippling deflation for years. 

According to the minutes, “a few members” pointed out that the goal of 2 percent inflation appeared “difficult to achieve” in the planned time frame of about two years, “since it was highly uncertain whether changes in inflation expectations would lead to a rise in the actual rate of inflation.” 

Some board members also noted that the bank’s aggressive easing policies appeared to have been perceived by the markets as “contradictory” — comments that highlighted the challenges that the bank and policy makers are wrestling with. 

The bank, on one hand, has committed to ending deflationary expectations and starting an economic recovery by flooding the economy with money, which would cause long-term interest rates to rise. But the bank has also committed to keeping those interest rates in check, partly by buying large amounts of government bonds. That has sowed confusion among market players over whether they should welcome or worry about the recent rise in long-term rates.

Haruhiko "The Keymaster Yoda" Kuroda should say "we want long-term interest rates to remain low until we hit 2 percent inflation, with the economy running at full capacity and potential levels and with the output gap closed. This means 2 percent inflation, not runaway inflation. To prevent runaway inflation we'll allow long-term rates to rise at the appropriate time. This will contain inflation. Hope that clears things up. Market players should look for signs that the output gap is closed. That's when rates will rise. We estimate output gap closure in two years depending on the international economic context (see China, the U.S. and Europe.)"

35 percent

No Villagers, this is not a center-right country by digby

CNN with the latest polling on Obamacare: 

Fifty-four percent of Americans oppose President Barack Obama’s signature domestic policy achievement, according to a CNN poll released Monday, while 43 percent support the law. 

But, for once they asked the most relevant follow-up question: 

Thirty-five percent of the country opposes the law because it’s too liberal, while 16 percent argues it isn’t liberal enough. 

That's right. It is not a majority position against a national health care plan or "big gummint" or any other of the typical beltway signifiers of a "center right nation." It turns out that only 35% of the country has that attitude. The majority either support the plan or want more. I doubt that most people every understand that from the way the polls are presented.

(via Thoma)

Robert Samuelson Mostly Right on Over-Valued Dollar by Dean Baker

The part of the story that Samuelson misses is that the over-valued dollar is a relatively recent phenomenon, not something that dates from the U.S. becoming the world's leading reserve currency. The dollars soared in 1997 as a result of the U.S. government and IMF"s mismanagement of the East Asian bailout from the financial crisis.

The conditions they imposed on the countries of the region led developing countries around the world to begin to accumulate massive amounts of dollars as a cushion so that they would not ever be in the situation that the East Asian countries found themselves in 1997. This means that the imbalances of the last 15 years can be directly attributed to the failures of the Greenspan-Rubin-Summers team (a.k.a. "The Committee that Saved the World") that directed the bailout.

AV Club reviews "Unconscious Selection" from Orphan Black

Monetary Policy

Mixed feelings. I consider myself liberal/progressive/left-of-center. But I'm in favor of monetary policy and humanitarian intervention. (See Bosnia and Rwanda and Darfur. Syria now is what Iraq would have been like without intervention. Probably worse.)

Waldmann's jihad against monetary policy.

I didn't get this first time around. Mike Konczal was reacting to Ramesh Ponnuru and David Beckworth in the worse and worse New Republic. They say fiscal policy doesn't work. He says monetary policy doesn't work. Krugman agrees saying that monetary policy hasn't offset austerity. But could it? Could if they set a 4 percent inflation target?

(What would it take for Ponnuru and Beckworth to be convinced that the focus on debts and deficits now is wrong and fiscal policy can help?)

The Four Percent Solution by Krugman

Larry Ball makes the case that we would be a lot better off with a 4 percent inflation target rather than the 2 percent that is now central bank orthodoxy. Intellectually, this position is hardly outlandish; indeed, Ball’s case is very similar to the case Olivier Blanchard made three years ago, just stated more forcefully and with more evidence. 

The basic point is that a higher baseline for inflation would make liquidity traps, in which conventional monetary policy is up against the zero lower bound, less likely and less costly when they happen. Ball estimates that if we had come into this crisis with an underlying inflation rate of 4 percent, average unemployment over the past three years would have been two percentage points lower. That’s huge — it amounts to millions of jobs and trillions of dollars of extra output. 

There are two main arguments against a higher inflation target. One is that events like the current crisis almost never happen. My view would be that the costs of this crisis are so large — and the difficulties we’ve had in responding so grotesque — that even if they were once-in-75-year events, that should be enough to warrant different policies. But Ball also argues that the risk of liquidity-trap events is much greater than conventional wisdom would have you believe. Just looking at US experience, the last three recessions were all “postmodern” recessions caused by private-sector overreach, not Fed tightening — and in each case the Fed had a very hard time getting traction. Both 1990-91 and 2001 were near misses in terms of the liquidity trap; 2007 onwards was actually in line with what had become the normal pattern, not a bizarre exception. 

By the way, one point Ball doesn’t mention is that to the extent that we consider Japan’s issues partly demographic, that’s becoming the norm too: low fertility and, perhaps, low resulting investment returns are also becoming standard among advanced countries. Again, this calls for a higher inflation target. 

The other argument is some kind of slippery slope thing: you decide that 4 percent is OK, and the next thing you know you’re Jimmy Carter, or maybe Weimar. As Ball says, there is really no evidence for this fear. It’s true that it’s what almost all central bankers believe; but they can’t really explain why, and we should never forget that there was once a time when almost all central bankers believed that going off the gold standard would mean the end of civilization. 

The point is that the conventional 2 percent target is a prejudice, nothing more; it once rested to some extent on studies suggesting that 2 percent was enough to make the zero lower bound a non-problem, but we now know how utterly wrong that view was; so we’re left with a target that’s considered respectable because it’s what all the respectable people say, and is what all the respectable people say because it’s considered respectable. 

What do we want? Four percent! When do we want it? Now!

My take is that monetary policy could have offest austerity. This doesn't mean fiscal policy won't work better.

Words are Wind and Empty Air

(P)IMP

The Liquidity Trap and Macro Textbooks by Simon Wren-Lewis

Obamacare Is Creating Uncertainty! Better Ditch It by Dean Baker

Obamacare Will Be A Debacle — For Republicans by Krugman

Bernanke, less than year left in office

Federal fiscal policy, taking into account both discretionary actions and so-called automatic stabilizers, was, on net, quite expansionary during the recession and early in the recovery. However, a substantial part of this impetus was offset by spending cuts and tax increases by state and local governments, most of which are subject to balanced-budget requirements, and by subsequent fiscal tightening at the federal level. Notably, over the past four years, state and local governments have cut civilian government employment by roughly 700,000 jobs, and total government employment has fallen by more than 800,000 jobs over the same period. For comparison, over the four years following the trough of the 2001 recession, total government employment rose by more than 500,000 jobs.

Bernanke's statement The Economic Outlook given before the Joint Economic Committee

'Not Too Late for the Social Credit Helicopters!' by Mark Thoma

Is this what Michael Kinsley wants?

Societal Ills Spike in Crisis-Stricken Greece By LIZ ALDERMAN

ATHENS — “Five euros only, just 5 euros,” whispered Maria, a young prostitute with sunken cheeks and bedraggled hair, as she pitched herself forward from the shadows of a graffiti-riddled alley in central Athens on a recent weeknight. 

As a chill wind swept paper and trash across a grimy sidewalk, Angelos Tzortzinis, a Greek photographer, caught sight of Maria lowering her price to the equivalent of about $6.50. Maria, who would only give a pseudonym, had hoped to get some money for food — and for a cheap but dangerous new street drug that has emerged during Greece’s crisis, guaranteed to obliterate her sorrows, if only for a moment. 

With the country heading into the fifth year of economic depression, and unemployment near 60 percent for young people, greater numbers of women and men are offering their bodies for next to nothing to get any scrap of money. According to the National Center for Social Research, the number of people selling sex has surged 150 percent in the last two years. 

Many prostitutes have been selling their services for as little as 10 to 15 euros, a price that has shrunk along with the income of clients afflicted by the crisis. Many more prostitutes are taking greater health risks by having unprotected sex, which sells for a premium. Still more are subject to violence and rape. 

Now a new menace has arisen: a type of crystal methamphetamine called shisha, after the Turkish water pipe, but otherwise known as poor man’s cocaine, brewed from barbiturates and other ingredients including alcohol, chlorine and even battery acid

I had hoped the change in ownership would improve the New Republic.

Amy Klobuchar Asks Ben Bernanke A Great Question And the Fed Chairman Has No Good Answer by Yglesias

Japan’s New Optimism Has Name: Abenomics

Is the Economy Saving Obama’s Approval Ratings? by Nate Silver

The Unemployed Need Bold, Creative Moves from the Fed by Mark Thoma

AV Club reviews "Second Sons" from Game of Thrones (newbies)

AV Club reviews "Second Sons" from Game of Thrones (experts)

AV Club reviews "Entangled Bank" from Orphan Black

Cotton-Eye Joe

Wherein I Try to Help Robert Waldmann Calm Down by David Glasner

(via Thoma)

The Problem of Collapsed Asset Bubbles

Steven Pearlstein Tries to Rescue His Austerity Pushing Friends by Dean Baker

These countries are suffering today from the fallout from collapsed asset bubbles, not their internal structural problems.The fault for these bubbles sits squarely with all the wise people at the ECB and EU who are now pushing austerity. Somehow they thought everything was fine in the years of the "Great Moderation" even though all the danger signs were flashing bright red. 

Making the people in these countries suffer does not in any obvious way fix their structural problems. It just ruins lives. Yeah, me and my fellow crusaders don't think that's cute. Better to ruin the lives of the elites who caused this crisis.

I Boldly Went Where Every Star Trek Movie and TV Show Has Gone Before by Yglesias

How the Case for Austerity Has Crumbled by Krugman

U.S. Budget Deficit Shrinks Far Faster Than Expected by Annie Lowrey

Triffin dilemma

I agree with many of the economic ideas put forward by Yglesias, Thoma, Krugman, DeLong and Baker (among others like Waldman and Bernstein and others on my bloglist). I've  learned a great deal from them and not just about economics, but about other things that surround the dialogue of econblogging. How to argue and have sense of humor and good attitude, etc. I almost always agree with them on the economics and usually on the politics which is much more subjective.

So it's illuminating to me when they disagree, which is rare, or on when they have differences of emphasis. It's not a competition of course it's just interesting to learn how these smart guys think.

For one thing they all want full employment. That's not the goal of glibertarians or cranks like Tyler Durden at Zero Hedge who's main focus is that it's all a scam to give banks money and America's days are numbered.

Anywaying it's interest how Dean Baker emphasizes the trade deficit and the strong dollar policy of Summers-Rubin, while DeLong and Krugman do not.

DeLong started off working for Summers and Krugman started off dismissing liberals' complaints about trade and NAFTA, as did DeLong. Bush's radicalism and nihilism pushed them both to the left.

Anyway I'm not clear on all of this but I don't think Dean Baker has mentioned monetary policy and the Triffin dilemma in regards to the trade deficit, except that monetary policy effects the exchange rate.

His story here from this morning makes sense to me. If I understand it correctly, the Triffin dilemma is where a reserve currency has to do monetary policy for the world and is posed with a dilemma, an example would can be seen in Europe which has a common currency but not a common banking union nor common fiscal policy.

Either have policy too tight in the center and appropriate for the periphery or it's appropriate for the center and too loose for the periphery. This is what happened in Europe which had appropriate policy for Germany during the 2000s after adoption of the Euro, but was too loose for the periphery. And now it is too tight for the periphery while appropirate for Germany.

I'm not sure how this fits with Rubin's strong dollar policy, but it did help our trading partners boost exports to the detriment of the U.S. export business. Clinton replaced this lost demand with demand from an asset bubble and Bush did the same with a housing bubble.

I think ultimately you can derive demand and full employment from some combination of trade/currency policy, fiscal and monetary policy. Each can be stimulative or not depending on the policies.

virtuous circle

What Does Japan Mean For The Rest of the World? by Tim Duy

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.