This Age of Bubbles by Krugman

54 Years Of Real Interest Rates by Krugman

Great Depression: Central Bank mismanagement

 Why Hawtrey and Cassel Trump Friedman and Schwartz by David Glasner

Not only did Friedman get both the theory and the history wrong, he made a bad move from his own ideological perspective, inasmuch as, according to his own narrative, the Great Depression was not triggered by a monetary disturbance; it was just that bad monetary-policy decisions exacerbated a serious, but not unusual, business-cycle downturn that had already started largely on its own. According to the Hawtrey-Cassel explanation, the source of the crisis was a deflation caused by the joint decisions of the various central banks — most importantly the Federal Reserve and the insane Bank of France — that were managing the restoration of the gold standard after World War I. The instability of the private sector played no part in this explanation. This is not to say that stability of the private sector is entailed by the Hawtrey-Cassel explanation, just that the explanation accounts for both the downturn and the subsequent prolonged deflation and high unemployment, with no need for an assumption, one way or the other, about the stability of the private sector.

Emphasis added.

bubblicious emerging markets

This would not be surprising to those who have read Krugman's 1999 book The Return of Depression Economics.

Generation B (For Bubble) by Krugman

So, the flood of money into emerging markets now looks in retrospect like another bubble. For the moment, I don’t see a good reason to believe that the bursting of this particular bubble will be catastrophic — what made the Asian crisis of 1997-8 so bad was the high level of foreign-currency denominated debt, and that seems less of an issue now. In fact, the main danger, as Ryan Avent says, seems to be policy overreaction: countries raising interest rates to defend indefensible exchange rates, leading to unnecessary slumps. But I have to admit that I’m less certain than usual about my diagnosis, because I’m still coming up to speed on the Indian economy in particular. 

Here, however, is a side question: why have we been having so many bubbles? 

The answer you hear from a lot of people is that it’s all caused by excessively easy money. But let’s think about the longer-term history for a bit. Here’s long-term U.S. interest rates since the early 1950s: 

 

As you can see, there was a period of very high rates in the inflationary 70s and early 80s. Rates fell after the Volcker stabilization, but they stayed relatively high by 50s/60s standards through the late 80s, the 90s, and even for much of the naughties. 

Now, the thing you need to realize is that the whole era since around 1985 has been one of successive bubbles. There was a huge commercial real estate bubble (pdf) in the 80s, closely tied up with the S&L crisis; a bubble in capital flows to Asia in the mid 90s; the dotcom bubble; the housing bubble; and now, it seems, the BRIC bubble. There was nothing comparable in the 50s and 60s. 

So, was monetary policy excessively easy through this whole period? If so, where’s the inflation? Maybe you can argue that loose money, for a while, shows up in asset prices rather than goods prices (although I’ve never seen that argument made well). But for a whole generation? 

So what was different? The answer seems obvious: financial deregulation, including capital account liberalization. Banks were set free — and went wild, again and again.

AV Club review of "Destino" from The Bridge

Under the Dumb

AV Club review of "The Fourth Hand" from Under the Dome

Breaking Bad

Slate TV Club discusses Breaking Bad

Krugman, Keynes, Kalecki, Konczal by John Quiggin

Keynes, Kalecki, Konczal, etc. by Krugman

Will: Rogues Gallery Stalwart

The sequester’s a public health hazard by George Will

Unfortunately, recent government behavior has damaged the cause of basic science. It has blurred the distinction between fundamental research and technical refinements (often of 19th-century technologies — faster trains, better batteries, longer-lasting light bulbs). It has sown confusion about the difference between supporting scientific research and practicing industrial policy with subsidies — often incompetently and sometimes corruptly dispensed — for private corporations oriented to existing markets rather than unimagined applications. And beginning with the indiscriminate and ineffective 2009 stimulus, government has incited indiscriminate hostility to public spending.

"Government has incited indiscriminate hostility to public spending?" What a dishonest hack. What a hypocrite!

George Will Wants the Government to Do Scientific Research  by Dean Baker

George Will Now Against Intentional Irrationality by Jonathan Chait

“cheap” or “dear” money

Friedman’s Dictum by David Glasner

In his link, DeLong quotes 

Friedman never understood that under the gold standard, it is the price level which is fixed and the money supply that is endogenously determined, which is why much of the Monetary History ... is fundamentally misguided owing to its comprehensive misunderstanding of the monetary adjustment mechanism under a convertible standard.

"endogenously determined" - "produced or grown from within."

Endogenous money

Endogenous money creation or destruction is the concept that each participant in the economy has their own version of a 'printing press' for money. This concept was explained by Irving Fisher in his treatise on The Theory of Interest (1930) in terms of the value of currency being affected by two (potentially opposing) movements - expected growth in the money supply reducing the real purchasing powerof money and expected increases in productivity increasing the real purchasing power of money.

This means that participants can affect the value of currency in a number of ways:

• Investment choices to invest in 'non productive' money equivalents rather than to invest directly in productive assets effectively increases the money supply, reducing the real value of currency.
• Demands for higher wages or supplier payments can increase the financing requirements of firms, creating a risk of 'supplier led inflation', effectively reducing the real value of currency.
• Choices made about the level of contribution to productivity can increase the real value of currency, (in fact this is the only mechanism which provides any basis for the real value of currency.)

This all adds up to the conclusion that participants have the power to affect the value of currency, albeit via less direct and potentially less effective mechanisms than simple printing of money by the central bank (exogenous money creation.)

Banks and the Monetary Base (Wonkish) by Krugman

Now, think about what happens when the Fed makes an open-market purchase of securities from banks. This unbalances the banks’ portfolio — they’re holding fewer securities and more reserve — and they will proceed to try to rebalance, buying more securities, and in the process will induce the public to hold both more currency and more deposits. That’s all that I mean when I say that the banks lend out the newly created reserves; you may consider this shorthand way of describing the process misleading, but I at least am not confused about the nature of the adjustment. 

And the crucial thing is that there are no puzzles or misunderstandings here. Tobin and Brainard got it all straight half a century ago, and anyone who thinks that there’s a big flaw in their reasoning is almost surely just getting caught up in his own word games.

Competition for loanable funds

To be able to provide home buyers and builders with the funds needed, banks must compete for deposits. The phenomenon of disintermediation had to dollars moving from savings accounts and into direct market instruments such as U.S. Department of Treasury obligations, agency securities, and corporate debt. One of the greatest factors in recent years in the movement of deposits was the tremendous growth of money market funds whose higher interest rates attracted consumer deposits.^[16]

To compete for deposits, US savings institutions offer many different types of plans:^[16]

• Passbook or ordinary deposit accounts — permit any amount to be added to or withdrawn from the account at any time.
• NOW and Super NOW accounts — function like checking accounts but earn interest. A minimum balance may be required on Super NOW accounts.
• Money market accounts — carry a monthly limit of preauthorized transfers to other accounts or persons and may require a minimum or average balance.
• Certificate accounts — subject to loss of some or all interest on withdrawals before maturity.
• Notice accounts — the equivalent of certificate accounts with an indefinite term. Savers agree to notify the institution a specified time before withdrawal.
• Individual retirement accounts (IRAs) and Keogh plans — a form of retirement savings in which the funds deposited and interest earned are exempt from income tax until after withdrawal.
• Checking accounts — offered by some institutions under definite restrictions.
• All withdrawals and deposits are completely the sole decision and responsibility of the account owner unless the parent or guardian is required to do otherwise for legal reasons.
• Club accounts and other savings accounts — designed to help people save regularly to meet certain goals.

Buckley red-baiting Samuelson; "there is no such thing as society"

Conservatives don’t get that some problems are public, and it’s hurting them by Mike Konczal

conservative double standards

Schroedinger’s Price Index by Krugman

Apparently Republicans are trying, once again, to extract chain-linking of Social Security benefits as the price of some kind of deal. I have no idea whether this will go anywhere; my guess, or maybe just my hope, is that Obama the Grand Bargainer has vanished from the scene. 

But there’s a funny point I hadn’t thought of until Matt O’Brien pointed it out. The alleged justification for chain-linking is that the conventional consumer price index overstates true inflation; it might overall, but probably not for seniors. In any case, however, as Matt points out, the very same Republicans who claim that Social Security benefits should be cut because the CPI overstates true inflation also insist that the Fed must stop quantitative easing, despite the absence of any visible inflation threat, because the real inflation rate is much higher than the official statistics indicate. 

But Matt, I think, fails to grasp the subtlety of the GOP position here. He accuses them of not knowing what they’re talking about. But surely what’s really happening is that they have a quantum-mechanics view of the situation: the state of the world in which the CPI overstates inflation and the state in which it understates inflation coexist in a condition of superposition, and what happens when you collapse the wave function depends on the position of the observer — that is, whether he’s trying to slash Social Security or bash Ben Bernanke. 

Or, on the other hand, maybe they don’t know what they’re talking about.

AV Club review "ID" from The Bridge

Our Summers of Discontent*

Refereeing the Neil Irwin Bette Midler Debate on Larry Summers by Dean Baker

Things are getting hot and heavy as the battle for Fed succession moves into the second half. Earlier this week, the Washington Post's Fed reporter, Neil Irwin, decided to go head to head with Bette Midler over some unflattering tweets about Larry Summers and his prospects for becoming Fed chair. As a public service, Beat the Press is refereeing the exchange. 

Ms Midler led off with the tweet: 

"HUH. The architect of bank deregulation, which turned straitlaced banks into casinos and bankers into pimps, may be next Head Fed: Summers." 

Irwin took issue with this by pointing out that the Clinton administration, as well as the Bush administration, were filled with proponents of deregulation. This would be people like Robert Rubin, Alan Greenspan and Timothy Geithner. Based on this background Irwin doesn't think it's fair to call Summers "the architect of bank deregulation."

We at Beat the Press have to call this one mostly for Midler. After all, Summers is known to be a forceful character, not just a shrinking violet who sits in the corner of the room. Regulation fans everywhere remember how Summers denounced Raghuram Rajan as a financial luddite for raising the possibility that deregulation might lead to instability in the financial system at the Fed's big Greenspanfest in 2005. 

Summers was a big actor in pushing the deregulation agenda. He deserves credit for his work. If we change Midler's tweet to read, "an architect of bank deregulation," she is 100 percent on the mark. 

Next Midler tweeted: 

"Larry Summers, Mr. De-Regulation, has never stepped forward to say..."Oops! My bad!" Five years of a world wide recession, and not a peep." 

Irwin doesn't dispute this one: no apologies from from Summers. We'll call that a draw.
Then we have Midler tweeting: 

"Larry Summers, a HUGE ADVOCATE of higher exec pay and bonuses for execs whose firms received billions in federal bailouts during the crisis." 

Irwin takes serious issue with this one. He assumes that this refers to the scandal around the hundreds of millions paid out in AIG bonuses even as the company was being kept on life support by the taxpayers. Irwin clearly takes Summers' side here: 

"In the wake of outcry over bonuses to AIG employees, for example, Summers said that the admnistration was trying to stop the bonuses but legally couldn’t. 'Secretary Geithner courageously has gone after these bonuses and will continue to go after these bonuses in a very aggressive way, but we can’t suspend the rule of law and we can’t put the whole economy at risk,' Summers said in a CNN interview. 'It is wrong to govern out of anger . . . we can’t let anger stop us from taking the steps that are necessary to maintain the stability of the financial system, keep credit flowing.' Not quite the same as being a huge advocate." 

We're not buying Irwin's line here. First it is not clear that this is Midler's point of reference. Summers was an advocate of the no questions asked bailout from day one, lobbying the Democratic caucus in September of 2008 to approve the TARP. At that moment, the market was passing judgement on the banks and prepared them to send them to the dustbin of history. 

If there was to be a bailout Congress could have imposed any terms it liked. Instead, Summers insisted that Congress just give up the money with no real conditions, otherwise we would have a second Great Depression. (Sorry, this is nonsense. The first Great Depression was not caused by a financial crisis alone at its start, but rather a decade of inadequate response. Summers surely knows this.) 

Even in the AIG case it is not clear the government could not have forced the bonuses to be taken back. It controlled the flow of money to the company, which it could have ended at any time. Faced with its literal demise, it is likely that the top execs at AIG could have forced substantial reductions in bonuses across the board. 

It's striking that Summers was so concerned about the "rule of law" in this case but seems to show little evidence of concern for the rule of law when it comes to pensions for workers in places like Detroit and Chicago. One could reasonably conclude from his behavior in this and other instances that Summers thinks that high CEO pay and bonuses, even at bailed out companies, is just fine. Beat the Press calls this one for Midler. 

So there you have it, Midler wins 2-0-1. 

Addendum: 

It's possible that in calling Summers a huge advocate of higher exec pay, Midler was referring to the accounts reported in Ron Suskind's book, Confidence Men: Wall Street, Washington, and the Education of a President. In this book, Suskind reports accounts of Summers discussing the market as a tool that exposes natural inequality. In other words, he believed that the large gaps in income that we see reflect differences in intelligence and skills.
That is certainly a plausible reference for Midler's tweet and would provide another reason to score the exchange for Midler.

---------------------------
*Our Summers of Discontent by Maureen Dowd.

Yglesias reverses himself on Glass-Steagall.

DeLong retweets a tweet bashing Dowd's column by Ashak Rao.

Under the Dumb

AV Club reviews "Thicker Than Water" from Under the Dome

Pigou effect and Ricardian Equivalence

Paul Krugman, Ricardian Equivalence, and the Pigou effect by Nick Rowe

WBAI and Doug Henwwod

The Decline & Fall of WBAI by Doug Henwood

Breaking Bad Star Trek story

(via New York Magazine)

Republican blocking minority and "macroprudential policies"

Synthesis Lost by Krugman

... 

First of all, the liquidity trap is real; conventional monetary policy, it turns out, can’t deal with really large negative shocks to demand. We can argue endlessly about whether unconventional monetary policy could do the trick, if only the Fed did it on a truly huge scale; but the fact is that the Fed hasn’t ever been willing, or felt that it had sufficient political room, to do that experiment. 

Second, while the evidence from austerity programs strongly suggests that fiscal policy does in fact work, with multipliers well above one, the political economy of policy turns out to make an effective fiscal response to depression very difficult. 

So the neoclassical synthesis — the idea that we can use monetary and fiscal policy to make the world safe for laissez-faire everywhere else — has failed the test. What does this mean? 

At the very least it means that we need “macroprudential” policies — regulations and taxes designed to limit the risk of crisis — even during good years, because we now know that we can’t count on an effective cleanup when crisis strikes. And I don’t just mean banking regulation; as the authors of the linked paper say, the logic of this argument calls for policies that discourage leverage in general, capital controls to limit foreign borrowing, and more. 

What’s more, you have to ask why, if markets are imperfect enough to generate the massive waste we’ve seen since 2008, we should believe that they get everything else right. I’ve always considered myself a free-market Keynesian — basically, a believer in Samuelson’s synthesis. But I’m far less sure of that position than I used to be.

Are We Doomed? by Ygelsias

the next Fed Chair

Central banking: still a man’s world by Gillian Tett

I'm Not Wild About Larry by Rana Foroohar

The Pigou Effect

The Pigou Effect (Double-super-special-wonkish) by Krugman

Via Brad DeLong, Robert Waldmann weighs in on the contributions or lack thereof of Milton Friedman, arguing that much of what he said was already there in Samuelson and Solow 1960. Actually, I’d give him more credit than that; the S-S paper — very unusually for both men, and for Bob Solow in particular — is one of those pieces sometimes described as “rich”, with many points alluded to but not many takeaway lines; to the extent that people did take something away, it was the crude notion of a usable downward-sloping Phillips curve, which turned out to be wrong.

Friedman — like Solow, in most of his work — was in the habit of writing crisp papers with very clear morals. So while you can,on a careful read, see from S-S why you should not in fact trust the Phillips curve to be stable, people didn’t actually get that until Friedman and Phelps laid out the point with stark clarity. Credit where credit is due.

Oh, and yes, I modeled my own intellectual style after Bob Solow’s (and Rudi Dornbusch, who was in the same tradition).

What caught me in the Waldmann piece, however, was the brief discussion of the Pigou effect, which supposedly refuted the notion of a liquidity trap. The what effect? Well, Pigou claimed that even if interest rates are up against the zero lower bound, falling prices will be expansionary, because the rising real value of the monetary base will make people wealthier. This is also often taken to mean that expansionary monetary policy also works, because it increases money holdings and thereby increases wealth and hence consumption.

And that’s where I came in (pdf). Looking at Japan in 1998, my gut reaction was similar to those of today’s market monetarists: I was sure that the Bank of Japan could reflate the economy if it were only willing to try. IS-LM said no, but I thought this had to be missing something, basically the Pigou effect: surely if the BoJ just printed enough money, it would burn a hole in peoples’ pockets, and reflation would follow.

But what I did was a little different from what the MMs have done this time around: I set out to prove my instincts right with a little model, a minimal thing that included actual intertemporal decisions instead of using the quasi-static IS-LM framework. [If you have no idea what I'm talking about, you have only yourself to blame -- I warned you in the headline]. And to my considerable surprise, the model told me the opposite of my preconception: there was no Pigou effect. Consumption was tied down in the current period by the Euler equation, so if you couldn’t move the real interest rate, nothing happened.

One way to say this — which Waldmann sort of says — is that even a helicopter drop of money has no effect in a world of Ricardian equivalence, since you know that the government will eventually have to tax the windfall away. Of course, you can invoke various kinds of imperfection to soften this result, but in that case it depends very much who gets the windfall and who pays the taxes, and we’re basically talking about fiscal rather than monetary policy. And it remains true that monetary expansion carried out through open-market operations does nothing at all.

In the simple model, the only channel through which money can operate when you’re against the zero lower bound is by changing expectations of future inflation. And that’s hard to do.

The main point, however, is that we are a very long way from classic monetarism, of the form that says that the central bank can control broad monetary aggregates like M2 at will, and in turn that these broad monetary aggregates determine the course of the economy. That’s not at all true when you’re up against the zero lower bound — which is why Friedman’s analysis of the Great Depression was wrong, and one reason (the other is the madness of the GOP) why modern Friedmanites are a very small group with no real constituency.

So what Bernanke recommended to the Bank of Japan was fiscal policy not monetary policy. So strictly speaking the central bank can do more, it's just that open-market operations do nothing.

KHAAAAAN!

commenter Denim at Economist's View:

Basically the New Deal was slowly bled in order to replace it with fierce dog eat dog competition among us wage slaves and small businesses via deregulation and turning a blind eye toward predatory pricing by the behemoths. That began with Jimmy Carter's Alfred E Kahn inflation and deregulation guru. All Presidents thereafter adopted this meme. All. 

http://en.wikipedia.org/wiki/Alfred_E._Kahn 

http://query.nytimes.com/mem/archive/pdf?res=F70B12FC3C5512728DDDA00894D9415B8084F1D3 

Why do the current crop think they have it right?
http://www.thedailybeast.com/articles/2013/04/26/daniel-kahneman-s-gripe-with-behavioral-economics.html

Pace Yglesias.

 

Obama

Good press conference by Obama yesterday. He stressed the Fed's role in fighting unemployment. He said that Summers's opponents floated his name to attack him pre-emptively, a "Washington trick." 

And he schooled the GOP over the ACA with heavy sarcasm. I was laughing. I thought he was better than Clinton.

the lame recovery

PAUL KRUGMAN: PHONY FEAR FACTOR: NOTED FOR AUGUST 9, 2013 by DeLong

DeLong approvingly quotes Krugman's column where he discusses debt deleveraging and the main thesis of the popular book "This Time It's Different." He also linked to a Krugman blogpost on the subject.

How does this jibe with DeLong's blogposts on the lame recovery? DeLong says the credit channel isn't working while Krugman says it's working fine, it's just that people are paying down debt instead of spending or investing. That's why recoveries from popped asset-bubbles take so much time (and because of poor demand management problems as Bernanke ironically noted when asked about the book by a Democratic member of the House.) Once people are finished deleveraging, they can redirect that demand towards consumption and investment. Five years is a long time. Also part of it is that people are scared. Young people are afraid to invest in a house when they've experienced relatives and friends lose their homes.

Gerson - rogues gallery troll

Michael Gerson Doesn't Like Quantitative Easing and Misrepresents Bernanke's Statements to Make His Case by Dean Baker

Michael Gerson used his column today to warn of the bad effects of quantitative easing, telling readers that it is concealing structural problems. To make his case, he completely misrepresented statements from Federal Reserve Board Chairman Ben Bernanke. 

After referring to comments from Mario Draghi, the President of the European Central Bank, urging governments take steps to increase potential growth, Gerson tells readers 

"Outgoing Fed Chairman Ben Bernanke has been gently suggesting there are limits to what the Fed can accomplish and warning against counterproductive fiscal policies and confidence-shaking political confrontations. Jeffrey Lacker, president of the Richmond Federal Reserve, argues that economic growth is limited 'in large part, by structural factors that monetary policy is not capable of offsetting.'" 

In this context readers would naturally believe that Bernanke was also warning about structural obstacles to growth, which is the theme pushed in the rest of Gerson's column. This is not true. 

Bernanke was very clearly warning about the negative effects of the sequester and ending of the payroll tax cut, both of which reduced demand. Gerson is being dishonest when he is trying to enliist Bernanke as an ally in his assertion that the obstacles to economic growth at the moment are primarily structural. He quite clearly believes the opposite which is what he told Congress in arguing for expansionary fiscal policy and also the reason why he would pursue his quantitative easing policy. 

It is also ironic that Gerson cites Germany as a success story that has effectively dealt with its structural problems. Germany's growth since 2007 has been no better than growth in the United States. (Part of this is explained by its lower population growth, which means that it has lower potential growth.) 

The main reason why Germany has an unemployment rate of just 5.4 percent, compared to 7.5 percent at the start of the downturn, is measures such as work sharing which encourage employers to keep workers on the job but with fewer hours. The average work year in Germany is almost 20 percent shorter than in the United States. This is a huge factor in explaining its high employment levels. Unfortunately Gerson neglected to mention this fact.

Phony Fear Factor by Krugman

The rightwing lies and lies about politics and political economy.

Franz Ferdinand

debt overhang

Doesn't exactly jibe with DeLong's take.

What Janet Yellen — And Everyone Else — Got Wrong by Krugman

Unfortunately, the economy didn’t come roaring back. Why? 

The best explanation, I think, lies in the debt overhang. For the most part, even those who correctly diagnosed a housing bubble failed to notice or at least to acknowledge the importance of the sharp rise in household debt that accompanied the bubble: 

 

Ratio of household debt to personal income 

And I would argue that this debt overhang has held back spending even though financial markets are operating more or less normally again. 

Finally, nobody really anticipated the disastrous response of policy, above all the squeeze on public spending at a time when we needed more government spending to sustain the economy until private balance sheets were repaired. Here’s total (all levels) government spending deflated by the implicit GDP deflator (an overall price index), comparing the last recession and aftermath with the Bush years; if spending had grown this time the way it did in the past, unemployment would probably be close to 6 percent: 

In short, getting the bubble right, while no small thing, wasn’t enough; Yellen (and many other people, myself included) underestimated the fragility of the financial system, but also the importance of household debt, and, above all, the foolishness of policymakers.

How does debt overhang show up in the demand data? Consumer spending? Business investment? Housing?

AV Club reviews "The Beast" from The Bridge

Colbert and friends dancing to Daft Punk

Daft Punk bailed on The Colbert Report last night, but Stephen Colbert emerged victorious

(Read the comment discussion, please.)

I saw on the Program Guide that Daft Punk was scheduled to be on Colbert so figured I'd check it out. Didn't expect to have MY FUCKING MIND BLOWN!!!

Bryan Cranston Roller Disco??? Jon Stewart Skyping from Iran??? War Criminal Kissinger working in his office! "WHISKEY-TANGO-FOXTROT-BANG-QUERY."

The Great C and its aftermath

THE FOUR MAJOR COMPONENTS OF AUTONOMOUS SPENDING ARE STILL 3% POINTS BELOW THEIR BUSINESS-CYCLE PEAK SHARES OF POTENTIAL GDP by DeLong

And that--plus extra drag from reduced consumption from the collapse of housing wealth and the underwater status of many homeowners--is why our GDP is currently 6 percent below the economy's productive potential and we have not had our V-shaped recovery.

[chart] 

Without a stronger economy and thus capacity shortages we are unlikely to get a boom in equipment investment. Without a much lower value of the dollar and a stronger world economy we are unlikely to get much stronger exports. If we are not going to get a much lower value of the economy, then strong short-run growth hinges on: 

a reversal of government-spending austerity and a restoration of government spending to its proper share of potential GDP; 

a housing recovery; or 

both. 

What are the policies that could produce such an outcome? And why isn't the Obama administration proposing them? 

Is it possible to raise the inflation target? by Simon Wren-Lewis

Money*

Money, get away
Get a good job with more pay
And your O.K.

Money, it's a gas
Grab that cash with both hands
And make a stash

New car, caviar, four star daydream
Think I'll buy me a football team

I like Ezra Klein and Wonkblog (Neil Irwin, Sarah Kliff, etc.), Greg Sargent and Harold Meyerson. Steve Callendar is hit or miss.

----------------------
*Pink Floyd tune

MMT

Guest post: Dual mandate — right goals, wrong agency? by Stephanie Kelton

Under the Dumb

AV Club reviews "Imperfect Circles" from Under the Dome

Pediction

Mistermix at the overrated Ballonjuice:

"If I worked at Slate, I’d be polishing my résumé ."

What a dick. The Washington Post Company is no longer losing money on the Post. It just sold Newsweek. Maybe he's right but I wouldn't be so hardcore dick confidant about the prediction. He wants to come off as a hard guy.

That being said, whenever there's a sale of one company to another, it's always bad news for the employees. Companies aren't charitable organizations. 

books and bankers can alter history

What did FDR Write Inside His Copy of the Proto-Keynesian Road to Plenty? by Mike Konczal

...Though Roosevelt didn't buy it at first, he thankfully later evolved on the issue. One lucky reason is because a big fan of the book was a Utah banker who read it intensely starting in 1931, when the Depression seemed like it would never end, much less recover. That man's name was Marriner Stoddard Eccles. The rest, as they say, is history. (Except it's not, because we are currently fighting this all over again.) 

The book* itself is a series of conversations among strangers on a Pullman-car over what is going on in the economy.

So if not for a book and an influential fan, things may have turned out very differently.

Detroit Rock City

Detroit Rock City

Hawk (Edward Furlong), Lex (Giuseppe Andrews), Trip (James DeBello), and Jam (Sam Huntington) are four rebellious teenagers who love rock and roll and idolize KISS. The group are elated to have tickets to see KISS in Detroit the following night. Having discovered a secret cache of KISS albums, Jam's ultra-conservative and religiously hysterical mother, Mrs. Bruce (Lin Shaye), races up to the house where the boys are hanging out and drags Jam home. Jam's mother discovers the tickets the next day and destroys them in front of Jam and the others. She then pulls Jam from his school and has him transferred to a Catholic boarding school.

While in class, the three remaining boys hear a radio contest for tickets to the show. Trip leaves class to call the contest line and ends up winning the tickets. The boys then ditch school to bust Jam out. At the Catholic school, Hawk disguises himself as a pizza delivery guy and delivers a pizza spiked with hallucinogenic psilocybin mushrooms to Father McNulty. The priest gets high, allowing the group to whisk Jam away.

On the freeway, Trip throws a slice of pizza out of the window, where it hits the windshield of a tailgating Trans Am, driven by two Italian-American Disco fanatics, Kenny and Bobby, along with their girlfriends Christine (Natasha Lyonne) and Barbara (Emmanuelle Chriqui). The enraged Kenny forces the station wagon off the road and proceeds to pull Hawk out of the car and rub his face on the cheese-covered windshield. The bullying upsets Christine who leaves, walking down the freeway. Hawk then knees Kenny in the groin and knocks him out, leaving Bobby to contend with all four boys who suddenly pull out weapons (A metal KISS belt buckle, a wallet chain, and Jam's drumsticks). They leave the disco fans tied to the guardrail with KISS makeup on and drive the Trans Am into a ditch. They come upon Christine walking down the freeway and offer a ride to the city.

Upon arrival, the groups discovers that Trip did not stay on the phone long enough to give the radio station his information, forcing the station to give the tickets to the next caller. Back outside, Lex notices that the car has been stolen. They suspect Christine, who they left sleeping in the car. Hawk then suggests that the boys go their separate ways in order to find KISS tickets, and agree to meet in the same place in an hour.

Hawk finds a scalper who suggests that he enter a strip contest to raise money for tickets. He doesn't win, but is offered payment for his company by an older woman (Shannon Tweed). They go to her car and she takes his virginity. Afterwards, Hawk declines the money she offered, but she insists. When Hawk locates the scalper again he runs off, indicating he's all sold out, much to Hawk's dismay.

Trip goes to a local convenience store in the hopes of mugging a younger child to get tickets. He grabs a kid in Ace Frehley makeup, but the kid has an older brother, Chongo; a hulking jock who, with his gang of thugs, threaten to beat him up unless Trip pays them $200.00. Trip plans to rob the convenience store with a fake gun (in reality a Stretch Armstrong toy), but ends up thwarting a real robbery attempt at the store, earning him a $150.00 reward and a passionate kiss from the cashier (Kristin Booth). Trip meets the thugs in an alleyway behind the store. The kid takes Trip's wallet and has Chongo punch Trip in the stomach.

Lex sneaks backstage with the KISS loading crew, but is soon discovered, causing him to flee from arena security. He is eventually caught and tossed over a fence. He is then menaced by a group of vicious dogs, but earns their trust when he plays frisbee with them. In a nearby building he discovers a chained-up Christine and his car in a chop shop with two car thieves. Lex then uses his newly befriended dogs to chase the two thugs into a back office room, saving Christine and his mom's car. Lex and Christine share a passionate kiss.

Jam encounters his mother leading an anti-KISS rally. Mrs. Bruce grabs him and drags him to a church across the street for confession, taking away his drumsticks. He is seen by Beth (Melanie Lynskey), a girl from his school who is in the process of moving with her parents. She rushes into the church and into the confessional booth. There she reveals to Jam that she's been in love with him since freshman year, but never had the courage to tell him. Jam and Beth then make love, losing their virginity to one another. Jam, now imbued with new confidence, goes back to the rally. Jam finally stands up for himself, berating his mother for her domineering ways, her lack of understanding and her hypocrisy at telling other people how to live their lives when she can't even relate to her own son. Jam then demands his drumsticks back and Mrs. Bruce acquiesces, though she's broken one of them.

When the boys meet up again, at Jam's suggestion, they beat each other up in order to say that muggers took their tickets. Upon arrival at the concert the guards are skeptical despite the boys nursing bloody wounds, but suddenly Trip points out the kid and his thugs from the convenience store, who are just entering the concert hall. The guards finds Trip's wallet (with his KISS Army picture ID and the $150.00 he got as reward for thwarting the robbery) on the kid's person. The tickets are taken from the kid and handed to Trip and security escorts the kid and his goons off the premises.

Astonished and elated, the boys enter the concert hall and KISS plays the title song of the movie, "Detroit Rock City". Jam catches a drum stick thrown by drummer Peter Criss as the film ends.

The New New Economy

The United States is doing better than Europe but not better than Germany.

In Germany, Union Culture Clashes With Amazon’s Labor Practices

Jeff Bezos Buys Washington Post—Not The Washington Post Company by Yglesias

post-war Fed

The Fed & Big Banking at the Crossroads by Paul Volcker

I have been struck by parallels between the challenges facing the Federal Reserve today and those when I first entered the Federal Reserve System as a neophyte economist in 1949.

Most striking then, as now, was the commitment of the Federal Reserve, which was and is a formally independent body, to maintaining a pattern of very low interest rates, ranging from near zero to 2.5 percent or less for Treasury bonds. If you feel a bit impatient about the prevailing rates, quite understandably so, recall that the earlier episode lasted fifteen years.

The initial steps taken in the midst of the depression of the 1930s to support the economy by keeping interest rates low were made at the Fed’s initiative. The pattern was held through World War II in explicit agreement with the Treasury. Then it persisted right in the  face of double-digit inflation after the war, increasingly under Treasury and presidential pressure to keep rates low.

The growing restiveness of the Federal Reserve was reflected in testimony by Marriner Eccles in 1948:

"Under the circumstances that now exist the Federal Reserve System is the greatest potential agent of inflation that man could possibly contrive."

This was pretty strong language by a sitting Fed governor and a long-serving board chairman. But it was then a fact that there were many doubts about whether the formality of the independent legal status of the central bank—guaranteed since it was created in 1913—could or should be sustained against Treasury and presidential importuning. At the time, the influential Hoover Commission on government reorganization itself expressed strong doubts about the Fed’s independence. In these years calls for freeing the market and letting the Fed’s interest rates rise met strong resistance from the government.

Treasury debt had enormously increased during World War II, exceeding 100 percent of the GDP, so there was concern about an intolerable impact on the budget if interest rates rose strongly. Moreover, if the Fed permitted higher interest rates this might lead to panicky and speculative reactions. Declines in bond prices, which would fall as interest rates rose, would drain bank capital. Main-line economists, and the Fed itself, worried that a sudden rise in interest rates could put the economy back in recession.

All of those concerns are in play today, some sixty years later, even if few now take the extreme view of the first report of the then new Council of Economic Advisers in 1948: “low interest rates at all times and under all conditions, even during inflation,” it said, would be desirable to promote investment and economic progress. Not exactly a robust defense of the Federal Reserve and independent monetary policy.

Eventually, the Federal Reserve did get restless, and finally in 1951 it rejected overt presidential pressure to maintain a ceiling on long-term Treasury rates. In the event, the ending of that ceiling, called the “peg,” was not dramatic. Interest rates did rise over time, but with markets habituated for years to a low interest rate, the price of long-term bonds remained at moderate levels. Monetary policy, free to act against incipient inflationary tendencies, contributed to fifteen years of stability in prices, accompanied by strong economic growth and high employment. The recessions were short and mild.

(Emphasis added.) "Short and mild" unlike Vocker's recession. His "exit strategy" was overrated.  Didn't the double-digit inflation/financial repression help with deleveraging. Many economists at the time like Paul Samuelson expected the economy to return to Depression after the war.

GREEN LANTERNISM: AN INFANTILE DISORDER by DeLong

Summers-fest

Can We Blame Larry Summers for the Collapse of Russia? by Dean Baker

Between 1990 and 1998, Russia’s economy suffered perhaps the worst downturn of any major country that was not the victim of either war or natural disaster. The proximate cause of course was the collapse of the Soviet Union and the replacement of its system of central planning with a market economy. Larry Summers played a large role in shaping this transition, first as chief economist for the World Bank, then as the undersecretary for international affairs at the Treasury Department and later as the Deputy Treasury Secretary.

Since Russia’s economy had been guided largely by central planning for close to 70 years, this transition would have been difficult even under the best of circumstances. However the actual transition was hardly the best of circumstances. Corruption infested every aspect of the privatization. Those with connections in the government were able to become billionaires almost overnight, as they were allowed to buy Russia’s businesses and resources at a small fraction of their market value. 

According to the World Bank, Russia’s government was paid just $8.3 billion from privatizing assets over the years 1990-1998, a period when most of its economy was turned over to private control. By comparison, Lukoil, Russia’s largest private oil company, had a market value of $268.8 billion on August 2, more than 30 times as much as the payments that Russia’s government received for all the assets it sold over this 8-year period.

The data clearly show the devastation that this failed transition imposed on the Russian people. According to the United Nation’s Human Development Report,Russia’s per capita income fell by one-third between 1990 and 2000, a decline that dwarfs the falloff in the Great Depression in the United States. This had enormous consequences in the daily lives of the Russian people as the system of social supports that provided basic services collapsed with nothing to replace it. The Development Report shows a drop in life expectancy fell from 68 in 1990 to 65 in 2000, a drop implying that millions of people would be dying at a younger age than would have been the case a decade earlier. 

The Development Report has no shortage of grim statistics about the plight of the Russian people in the 1990s. (Those getting depressed by this story should know that Russia made rapid progress in most measures of economic and social well-being after breaking with the Summers agenda in 1998. By 2012, the losses of the 1990s had been more than completely reversed.) However, the question remains whether we can blame Larry Summers for this disaster? 

At the American Economic Association convention in January of 1994, Larry Summers gave a talk about the successes of the first year of the Clinton administration. He boasted how “this administration” (a phrase repeated many times) had created more than 1.8 million jobs. He also boasted about the 2.0 percent growth the economy had seen to date. 

This was peculiar for two reasons. First, the economy almost always creates jobs and grows; the relevant question is the rate of job creation and the pace of economic growth. Boasting that jobs are being created and the economy is growing is a bit like taking credit for the sun rising. The other reason that Summers’ talk was peculiar was that he was making these boasts to economists, all of whom know that the economy typically creates jobs and grows. 

Alan Blinder, who was also on the panel and one of Summers’ colleagues in the administration as a member of the Council of Economic Advisers, provided an interesting contrast in his own presentation. Blinder managed to talk forthrightly about the fact that the economy was not growing as fast as the administration wanted, nor was it creating as many jobs as was hoped. He did this in a way that provided useful insights to the audience while not providing any of the reporters in the room with fodder for embarrassing headlines in the next day’s paper. 

But the point of this digression is Summers, not Blinder. Summers apparently felt that the Clinton administration deserved credit for the meager number of jobs and slow growth that the economy had generated up to that point. If that’s the case, then by the Summers standard, surely we can hold Mr. Summers accountable for the devastation that Russia’s transition inflicted on its people in the 1990s. 

Call it item # 412 in the case for Larry Summers for Federal Reserve Board chair.

savings glut

"Savings Glut" Means Much of Economics Is WRONG by Dean Baker

This exchange (here, here, and here) between my friend Jared Bernstein and Casey Mulligan is worth a brief comment. As I've told several people who followed it, Mulligan is absolutely presenting the mainstream position in the profession, but Jared is right.

The question, if we ignore silly semantics, is whether the economy typically faces a problem of insufficient demand. In other words, if companies, families, or the government went out spent $500 billion tomorrow would this boost growth or just cause inflation. (Yes, I used all three interchangeably because if the problem is a lack of demand it doesn't matter who spends the money, the short-term effect on the economy is the same.)

Mulligan presents the orthodoxy, periods where lack of demand is a problem are the exception. As a general rule the economy is at or near full employment. In that context the primary result of more spending is higher inflation as we lack the ability to actually produce more goods and services. In this view, the way we get the economy to grow is by increasing supply side factors, like giving workers more incentive to work, training them better, getting more and better capital, and improving technology. By contrast, Jared is making the argument that if workers had higher wages they would be spending more money, which would lead to more output and possibly more investment as well (yes, a supply side effect).

Mulligan acknowledges that we could be in such a situation now, but that this is an exception. This sort of demand shortfall would not generally be an issue. (There was a similar sort of exchange between Paul Krugman and Joe Stiglitz earlier this year with Krugman taking the Mulligan position . [It is the mainstream position.])

In agreeing with Jared and Stiglitz I would like to introduce the widely discussed "savings glut" from the last decade as a major piece of evidence. While many of the people who knowingly talked about this glut may not know it, a savings glut means a shortfall of demand. In a world with a savings glut the problem is that people are not spending enough money to buy up all the goods and services that the economy is capable of producing.

This means that anyone who believed there was a savings glut in the last decade agrees with Jared and Stiglitz, the economy had a serious problem of inadequate aggregate demand. In this world, if workers get higher pay, this translates into more jobs and higher GDP. (We won't call it "growth" in deference to Mulligan.)

There are some other propositions that would follow from the savings glut as well. In this world government deficits are helpful to the economy. They boost demand. That's bad news for the folks who want to say the Bush tax cuts wreck the economy. (No, I have not become a fan of giving money to rich people, but no one pays me to shill for the Democrats.)

The basic economic problem becomes how to find ways to either increase demand on a sustained basis or adjust to a situation in which we will maintain a lower level of output without hurting people with inadequate incomes. (Can anyone say reduced workweeks and longer vacations?)

Anyhow, this is about the most fundamental point that we can have in economics. It is amazing how much confusion exists on the topic.

The Global Saving Glut and the U.S. Current Account Deficit by Bernanke

Stiglitz, Minsky, and Obama by Krugman

Also, there’s a danger in the Stiglitzian approach, namely that people might conclude that fixing the short-run shortfall in demand must wait until we fix the long-run problem of inequality, which is going to be very hard and a long time coming. We need stimulus, or at least an end to austerity, now, even if restoring a middle-class society isn’t going to happen any time soon.

What Janet Yellen Did and Didn't Get Wrong About the Housing Bubble by Matt O'Brien

...As Scott Sumner points out, housing starts halved between January 2006 and April 2008, but unemployment only went from 4.7 percent to ... 4.9 percent. 

He seems to agree with DeLong more than Baker. DeLong has pointed to this and I remember commenters saying there's a lag. Two years is a long lag and then the jump was sudden as there was a financial crisis.

GDP revisions: not a conspiracy, Jack by Doug Henwood

deregulation and currency policy

Economists Behaving Badly, Redux by Krugman

Brad DeLong asks why the left views Larry Summers as a right-wing hyena. I think that’s a straw man, or maybe a straw hyena. What is true is that a lot of people even on the moderate left don’t trust Summers, even though much of his commentary over the years has been very much center-left — and since leaving office he has become one of our most prominent fiscal doves. 

Where does this mistrust come from? Well, let me give you an example: Jackson Hole, 2005, a conference dedicated to celebrating the record of, ahem, Alan Greenspan. Raghuram Rajan had presented a paper warning that the risks of financial instability were much higher than most people were acknowledging. (I think Rajan has been wrong on many issues since then, but that was certainly a prophetic paper). And the response, in general, took the form of ridicule. 

The principal discussant was Don Kohn (pdf), who was (barely) polite but completely wrong-headed, celebrating financial innovations such as “the growing ease of housing equity extraction”:
 

Leading off on the rest of the discussion (pdf) was Larry Summers, who wasn’t polite, dismissing Rajan for being “slightly Luddite” in questioning the value of financial innovation, which he compared (in a really bad analogy) to technological progress in transportation. 

Now, lots of people got this stuff wrong — although you want to bear in mind that we’re not talking about the 1990s now, we’re talking about 2005. And we all make mistakes. But have either Summers or Kohn ever acknowledged that they got it wrong, and explained why? 

And you can see, I think, why “the left” — while not, in fact, viewing Summers as a hyena — is a bit upset that the only people President Obama has mentioned as alternatives to Janet Yellen are Summers and Kohn. 

Larry Summers and Financial Crises: Is He Being Graded on Attendance? by Dean Baker

GDP Grew at Anemic 1.7% Rate Last Quarter. Thanks, Sequester! by Kevin Drum

As I recall, CBO estimated that the sequester alone would cut about 0.8 percent from GDP growth. The fiscal cliff deal might have added another 0.4 percent. If they were right, it means that 2.9 percent growth has been pared back to 1.7 percent. My rough eyeballing of the figures suggests to me that this was probably an overestimate, but probably only by a bit. I'll bet that without the latest round of austerity, growth would have been in the range of 2.5 percent.

Profit Shares Even Higher With New GDP Measures by Dean Baker

The government sector continued to contract, declining at a 0.4 percent annual rate. A 1.5 percent drop in federal spending more than offset a 0.3 percent rise in state and local government spending. The revisions show that government spending has been more of a drag on the economy than had been previously reported. The growth rate of spending was revised down by 0.5 percentage points in both 2009 and 2010 and by 0.7 percentage points in 2011; although growth for 2012 was revised up by 0.7 percentage points. 

One distressing sign in the second-quarter data was a 9.5 percent surge in imports. As a result of this sharp rise, trade subtracted 0.8 percentage points from growth in the quarter.
...

The new data also show profit shares rising even more than had earlier been reported. The profit share of net corporate output rose to 25.5 percent in 2012, the fourth-highest share in the post-war era. The after-tax share was over 19.0 percent in each year from 2010-2012. 

This is a full percentage point below the economy's potential GDP growth. This growth rate would usually be associated with a rise in the unemployment rather than the decline that we have seen over this period.

the greatest show that ever was or will be

Game Of Thrones gambles on adding a character who likes to have sex

As part of a daring bid to finally introduce some sex to Game Of Thrones, the HBO series has cast Indira Varma as Ellaria Sand, described by TV Line as “the sexually frisky lady friend” of the recently cast Oberyn Martell. Without giving too much away, Ellaria Sand kills every single other character while they’re all attending a housewarming party—one, it bears mentioning, they didn’t even want to attend—then becomes queen of the known world, spending the rest of the series having frisky sex with their corpses. “I won the game of thrones!” she will proclaim while astride their slackened bodies, week after week. Anyway, Varma is a veteran of HBO shows that mix swordplay and the other kind of swordplay, as she is, like Mance Rayder portrayer Ciaran Hinds, a veteran of Rome—a canceled series that similarly concerned dynastic struggles, but lacked the foresight to have any cool dragons. It did have lots of sex, though; here's hoping that works out slightly better for Game Of Thrones.

Shit just got real

AV Club reviews "The Endless Thirst" from Under the Dome

This middle part of the episode is the closest Under The Dome has come to matching King’s vision of Chester’s Mill: It’s all tight-knit and neighborly until the shit hits the fan, and then it’s every man for himself. Of course, a handful of people are still trying to do the right thing...

Already-strong case for Yellen strengthens further, and a word about the inanity of “market” preferences by Cardiff Garcia

Alan Blinder:

Fast forward to her days leading the San Francisco Fed, where she warned, as early as 2005, that the titanic real-estate market was heading for an iceberg. Ms. Yellen was frustrated that the Fed’s Board of Governors would not even issue regulatory guidance to curb disgraceful lending practices like piggyback loans that exceeded 100% of the house’s value, or loans with little or no documentation. When the board finally did so, she was dismayed at how weak the guidance was. She later told the Financial Crisis Inquiry Committee: “You could take it out and rip it up and throw it in the garbage can.” The guidance, she added, “wasn’t of any use” to the San Francisco Fed.

Feisty, but true. Had Washington listened to her, it would have cracked down on bad lending practices sooner, and the crisis would have been less devastating. After a thorough recent review of her record as a bank regulator, the Center for Public Integrity entitled their report “Yellen as Fed chair would be tougher on banks”—which tells you why some of the big banks are not thrilled at the prospect.

So much for the lack of toughness. See also Carola Binder.

Abenomics

Japan and the consumption tax by Simon Wren-Lewis

...A key issue is the proposal to raise the national consumption/sales tax from 5% to 10% in two stages beginning in April next year. Japanese Prime Minister Shinzo Abe says he will wait until probably the autumn to make a final decision, and the macroeconomic outlook will be a key factor. The proposal has the support of Bank of Japan governor Haruhiko Kuroda. However the more interesting question for Kuroda is how the Bank will react to the sales tax increase.

Much of the reporting on this issue is along the familiar lines of whether it is better to focus on reducing the government’s very high level of debt (raise sales taxes) or ending deflation in Japan (don’t raise sales taxes). While this debate is a familiar one, there is an additional twist with a sales tax. An anticipated increase in sales taxes, by raising expected inflation, will - other things being equal - provide an incentive for consumers to bring forward their spending. Macroeconomists would describe this as a real interest rate effect, but in simpler terms it makes sense to buy before prices go up.

How does an anticipated increase in sales tax raise expected inflation? It brings spending forward in anticipation of higher prices?

This incentive effect has been observed in Japan in the past, and in other countries. (See page 12 of this IMF report on the issue.) The UK cut VAT for just one year in response to the recession in 2009, a measure I have described as New Keynesian countercyclical fiscal policy, and this may have raised consumption by over 1%, in part because consumers anticipated that prices would rise again in 2010. (The over 1% figure comes from here, although this analysis is more conservative.)

Didn't the UK "cut" VAT not raise taxes?

More on tax increases versus spending cuts in an austerity programme by Simon Wren-Lewis

Commenters, butteflys, etc. by Scott Sumner

Baker disagrees with DeLong on housing

Why Better Housing Policy Would Not Fill the Demand Gap by Dean Baker

Brad has two contentions. First that years of very low building has led to huge pent-up demand for new housing units and second that if underwater homeowners could refinance their homes then we would see much more consumption...

Obama's unforced error

MORE JOBS AND HIGHER MIDDLE CLASS INCOMES AS ECONOMIC POLICY JOB #1: HOUSING POLICY EDITION by DeLong