reverse income policies

Time for helicopter money?

Recently, more radical proposals have surfaced, reflecting a sense of urgency and widespread disappointment with the impact of current monetary policy. Beyond advocating higher minimum wages, some are calling* for “reverse income policies,” with governments imposing across-the-board wage increases on private employers – a move that would drive up prices and defeat deflationary expectations. The fact that economists whose views typically fall nowhere near those of the far left are even thinking about such interventionism shows just how extreme circumstances have become. 

I favor all of these proposals, in some form. The details of their implementation would obviously have to vary, depending on each economy’s circumstances. Germany, for example, is in a strong position to implement a reverse income policy, given its huge current-account surplus, though there would undoubtedly be major political barriers. More spending on education, skills upgrading, and infrastructure, however, is a no-brainer almost everywhere, and is politically more feasible.

*  Getting Serious about Wage Inflation in Japan by Blanchard and Posen

Yanis Varoufakis on People's QE

MY ‘ADVICE’ TO JEREMY CORBYN… AND GEORGE OSBORNE by Yanis Varoufakis

The Labour Party has an instinctive urge to protect those left behind by the long years of uneven private-debt-fuelled growth and its austerian aftermath. This is good and proper. However, it would be a mistake to waste Labour’s energies on tirades against austerity. If I am right that austerity is a symptom of low investment (and of a government keen to push the inevitable burden on the weaker citizens), Labour should concentrate on policies that will shift idle savings into investment funding, engendering new technologies that produce green, sustainable development and high quality jobs. 
 
Such an economic program will require the creation of a public investment bank that issues its own bonds (to be supported by a non-inflationary Bank of England quantitative easing strategy targeting these bonds), but also a new alliance with enlightened industrialists and parts of the City keen to profit from sustainable recovery. Labour, I believe, will only overcome its infighting, and the toxic media campaign against its leader, by escaping into a Green, investment-led British Renaissance.

Tulsi Gabbard!

Tulsi Gabbard, Rising Democratic Star, Endorses Bernie Sanders by Yamiche Alcindor

“As a veteran of two Middle East deployments, I know first hand the cost of war,” said Ms. Gabbard, one of the first female combat veterans to serve in Congress. “I know how important it is that our commander-in-chief has the sound judgment required to know when to use America’s military power and when not to use that power.

“As a vice chair of the D.N.C., I am required to stay neutral in democratic primaries, but I cannot remain neutral any longer,” she added. “The stakes are just too high. That’s why today I’m endorsing Senator Bernie Sanders to be our next president and commander in chief of the United States.”

Ms. Gabbard, while not mentioning Mrs. Clinton by name, went on to cast Mr. Sanders as being more interested in peace and as someone who would be better trusted with the lives of American troops. She also implied that Mr. Sanders had better foreign policy judgment than his rival.

“We need a commander in chief who has foresight, who exercises good judgment, and who understands the need for a robust foreign policy which defends the safety and security of the American people, and who will not waste precious lives and money on interventionist wars of regime change,” Ms. Gabbard said. “We can elect a president who will lead us into more interventionist wars of regime change, or we can elect a president who will usher in a new era of peace and prosperity.”

Ms. Gabbard, who was born in American Samoa and is the first Hindu elected to Congress, is seen as a young, rising star of the party but has publicly battled Democratic leadership. In October, Ms. Gabbard said she was uninvited from the first Democratic presidential primary debate by the chief of staff to Representative Debbie Wasserman Schultz of Florida, the chairwoman of the national committee, after Ms. Gabbard appeared on television and called for more debates.

At the time, the party’s leadership had been criticized for allowing only a limited number of debates, which some viewed as an effort to deny Mr. Sanders more time to confront Mrs. Clinton when she was ahead in polls. Ms. Wasserman Schultz has denied that Ms. Gabbard was uninvited from the debate.

Mr. Sanders welcomed Ms. Gabbard’s endorsement Sunday.

“Congresswoman Gabbard is one of the important voices of a new generation of leaders,” Mr. Sanders said in a statement. “As a veteran of the Iraq War she understands the cost of war and is fighting to create a foreign policy that not only protects America but keeps us out of perpetual wars that we should not be in.”

Ms. Wasserman Schultz praised Ms. Gabbard with a statement of her own. “As one of the first female combat veterans to serve in Congress and the first American Samoan and Hindu member of Congress, Congresswoman Gabbard is a role model who embodies the American ideal that anyone can dream big and make a difference,” Ms. Wasserman Schultz said. “She is also a colleague in Congress and a friend, and I look forward to continuing to work alongside her when our Party unites behind whoever emerges as our nominee.”

DeLong, Waldman, and Waldmann

Welfare economics: an introduction (part 1 of a series) by Steve Randy Waldman

New Keynesian Orthdoxy and Hysteresis by Robert Waldmann
DeLong:

Must-Read: I want to endorse this line of thinking from Paul Krugman because I think it is completely right. My initial worries about Sanders-Friedman was that it made promises about where we could get as far as economic growth over the next decade that were very unlikely to be achievable. More important is the Romers' accurate critique that Sanders's plan would not even come close to getting us there even in the unlikely possibility that things do break the way that Sanders-Friedman. And that generates the corollary that is perhaps most important: Sanders's plans look seriously underpowered, and we should be trying to assemble a coalition to do even more than he envisions come 2017...

DeLong:

Must-Read: IMHO, Paul Krugman should have had not two but four parting observations:

• Primaries are valuable testing grounds for candidates' ideas and teams, which is a point he makes.
• It's dangerous to believe something because it is what you want to hear, which is a point he makes.
• A point he doesn't make but should: If you believe that hysteresis is not a one-way ratchet--that it is as easy to boost potential via a high-pressure economy as to destroy it via prolonged depression--Sanders's stimulus plans are underpowered by a factor of four.
• A point he doesn't make but should: If you believe--which I do--that so far hysteresis has only gobbled about two-thirds of the gap between current production and the pre-2008 trend, then Sanders's fiscal stimulus plans are about the right size--and HRC's are much too small.

Galbraith on orthodox forecasters

Economic Forecasting Models and Sanders Program Controversy by James K. Galbraith

Cassidy on Sanders

Bernie Sanders and the Case for a New Economic-Stimulus Package by John Cassidy

Romer, Friedman, Krugman and models

Romer and Bernstein on stimulus by Krugman

January 10, 2009

Kudos, by the way, to the administration-in-waiting for providing this — it will be a joy to argue policy with an administration that provides comprehensible, honest reports, not case studies in how to lie with statistics. 

That said, the report is written in such a way as to make it hard to figure out exactly what’s in the plan. This also makes it hard to evaluate the reasonableness of the assumed multipliers....

Vinyl - yesterday once more

helicopter drops

Helicopter drops might not be far away by Martin Wolf (2.23.16)

The world economy is slowing, both structurally and cyclically. How might policy respond? With desperate improvisations, no doubt. Negative interest rates have already moved from the unthinkable to reality (see charts). The next step is likely to include fiscal expansion. Indeed, this is what the OECD, long an enthusiast for fiscal austerity, recommends in its Interim Economic Outlook. But that is unlikely to be the end. With fiscal expansion might go direct monetary support, including the most radical policy of all: the “helicopter drops” of money recommended by the late Milton Friedman.

More recently, this is the policy foreseen by Ray Dalio, founder of Bridgewater, a hedge fund. The world economy is not just slowing, he argues, but “monetary policy 1” — lower interest rates — and “monetary policy 2” — quantitative easing — are largely exhausted. Thus, he says, the world will need a “monetary policy 3” directly targeted at encouraging spending. That we might need such a policy is also the recommendation of Adair Turner, former chairman of the Financial Services Authority, in his book Between Debt and the Devil .

Why might the world be driven to such expedients? The short answer is that the global economy is slowing durably. The OECD now forecasts growth of global output in 2016 “to be no higher than in 2015, itself the slowest pace in the past five years”. Behind this is a simple reality: the global savings glut — the tendency for desired savings to rise more than desired investment — is growing and so the “chronic demand deficiency syndrome” is worsening.

This stage of demand weakness must be seen in its historical context. The long-term real interest rate on safe securities has been declining for at least two decades. It has been near zero since the financial crisis of 2007-09. Before then, an unsustainable western credit boom offset the weakness of demand. Afterwards, fiscal deficits, zero interest rates and expansions of central bank balance sheets stabilised demand in the west, while a credit expansion funded massive investment in China. Loose western monetary policies and loose Chinese credit policies also drove the post-crisis commodity boom, though China’s exceptional growth was the most important single factor.

The end of these credit booms is an important cause of today’s weak demand. But demand is also weak relative to a slowing growth of supply. At the world level, growth of labour supply and labour productivity have fallen sharply since the middle of the last decade. Lower growth of potential output itself weakens demand, because it lowers investment, always a crucial driver of spending in a capitalist economy.

It is this background — slowing growth of supply, rising imbalances between desired savings and investment, the end of unsustainable credit booms and, not least, a legacy of huge debt overhangs and weakened financial systems — that explains the current predicament. It explains, too, why economies that cannot generate adequate demand at home are compelled towards beggar-my-neighbour, export-led growth via weakening exchange rates. Japan and the eurozone are in that club. So, too, are the emerging economies with collapsed exchange rates. China is resisting, but for how long? A weaker renminbi seems almost inevitable, whatever the authorities say.

[graph]

No simple solutions for the global economic imbalances of today exist, only palliatives. The current favourite flavour in monetary policy is negative interest rates. Mr Dalio argues that: “While negative interest rates will make cash a bit less attractive (but not much), it won’t drive . . . savers to buy the sort of assets that will finance spending.” I agree. I cannot imagine that businesses will rush to invest as a result. The same is true of conventional quantitative easing. The biggest effect of these policies is likely to be via exchange rates. In effect, other countries will be seeking export-led growth vis-à-vis over-borrowed US consumers. That is bound to blow up.

One alternative then is fiscal policy. The OECD argues, persuasively, that co-ordinated expansion of public investment, combined with appropriate structural reforms, could expand output and even lower the ratio of public debt to gross domestic product. This is particularly plausible nowadays, because the major governments are able to borrow at zero or even negative real interest rates, long term. The austerity obsession, even when borrowing costs are so low, is lunatic (see chart).

If the fiscal authorities are unwilling to behave so sensibly — and the signs, alas, are that they are not — central banks are the only players. They could be given the power to send money, ideally in electronic form, to every adult citizen. Would this add to demand? Absolutely. Under existing monetary arrangements, it would also generate a permanent rise in the reserves of commercial banks at the central bank. The easy way to contain any long-term monetary effects would be to raise reserve requirements. These could then become a desirable feature of our unstable banking systems.

The main point is this. The economic forces that have brought the world economy to zero real interest rates and, increasingly, negative central bank rates are, if anything, now strengthening. This is what the world economy is showing. This is what monetary policy is indicating. Increasingly, this is what asset prices are demonstrating.

Policymakers must prepare for a new “new normal” in which policy becomes more uncomfortable, more unconventional, or both. Can the world escape from the chronic demand weakness? Absolutely, yes. Will it? That demands greater boldness. When one has exhausted the just about possible, what remains, however improbable, must be the answer.

Kocherlakota, Baker and Thoma on the limits of growth

Growth Begets Growth: Reflections on Total Factor Productivity by N. Kocherlakota

President Obama’s Council of Economic Advisers Confirms Sanders’ Growth Projections by Dean Baker

Here’s Why Bernie Sanders’ 5% Growth Plan Isn’t Crazy After All by Mark Thoma

No Voices in the Sky - Motörhead

Baker and Konczal on the CEA letter

The Four Economists' Big Letter by Dean Baker

In Praise of the Wonk: Dissecting the CEA Letter and Sanders’s Other Proposals by Mike Konczal

Friedman and Sanders's macro policies

Bernie Sanders' Non-Growth Dividend by Dean Baker

I endorse… by Jared Bernstein

Can Sanders Do It? by J.W. Mason

letter from Jamie Galbraith to the 4 CEA chairs

“Extreme” doesn’t mean what it used to, Sanders vs the CEA by Matthew C. Klein

Yglesias on Bernienomics

Top Democratic economists don't think much of Bernienomics. He doesn’t care. by Matt Yglesias

Waldman on Bernie Sanders

Your theory of politics is wrong by Steve Randy Waldman

Better Call Saul

In the first season's episode "Hero," Kim invites Jimmy to go see the "The Thing" for some Kurt Russell action. I love her! And I love this show!

AV Club reviews "Switch"

High-Rise

Common People and Downton Abbey

AV Club reviews Downton Abbey

Colony episode 3

Will tells Katie he's playing the long game. Not only they'll get their son back but....

And the teacher saw something big in low-level orbit.

Entertainment Weekly recap.

Big Lewboski

Maud: Tell my about yourself, Jeffrey.

Lebowski: Well, not much to tell. I, um, was one of the authors of the Port Huron statement, the original statement not the compromise second draft. Did you ever hear of the Seattle Seven?

Maud: Hmmm.

Lebowski: That was me. There was six other guys. And then the music business briefly.

Maud: Oh.

Lebowski: Yeah. Roadie for Metallica. Speed of Sound tour. A little of this and little that. My career has slowed down lately.

Maud: What do you do for recreation?

Lebowski: Oh the usual. Bowl. Drive around. The occasional acid flashback.

Weisbrot on Krugman

Paul Krugman Misunderstands Bernie Sanders by Marc Weisbrot

Baker on Sanders vs Hillary; Ygelsias on Sanders and Fed

Washington Post Takes Wild Swings at Bernie Sanders by Dean Baker

Bernie Sanders has the most realistic plan to boost wages and job creation by Matt Yglesias

Psylocke

Glasner on Bernanke and QE

David Glasner has been critical of Bernanke's explanations of how QE works:

The Good News and the (Very) Bad News about Bernanke’s Speech

Bernanke’s Continuing Confusion about How Monetary Policy Works

Wray on Minksy

Why Minsky Matters: An Introduction to the Work of a Maverick Economist, by L. Randall Wray by Victoria Bateman

Piketty and Capital in the 21st Century

Capital, Predistribution and Redistribution by Thomas Piketty

DeLong and monetary financing

Future Economists Will Probably Call This Decade the 'Longest Depression' by Brad DeLong

What we need now is 1) debt relief to unwind the overhang and 2) much tighter financial regulation to prevent the growth of new fragilities. And if those prove inconsistent with full recovery, then we need massive government spending on infrastructure and other investments financed by money printing until full employment is reattained.

Dean Baker on Fed

The Wall Street Journal, the Federal Reserve Board, and the Presidential Candidates by Dean Baker

liquidity trap and secular stagnation

What Is the Eccles Building Thinking Today? III: The Mysterious Absence of Paul Krugman Thought by DeLong

Economists’ evolving understanding of the zero-rate liquidity trap by Ryan Avent

Motörhead

Sanders on the Fed

To Rein In Wall Street, Fix the Fed by Bernie Sanders

The recent decision by the Fed to raise interest rates is the latest example of the rigged economic system. Big bankers and their supporters in Congress have been telling us for years that runaway inflation is just around the corner. They have been dead wrong each time. Raising interest rates now is a disaster for small business owners who need loans to hire more workers and Americans who need more jobs and higher wages. As a rule, the Fed should not raise interest rates until unemployment is lower than 4 percent. Raising rates must be done only as a last resort — not to fight phantom inflation.

Quiggin and DeLong on Piketty

Piketty and the Australian exception by John Quiggin

The Melting Away of North Atlantic Social Democracy by J. Bradford DeLong

Fed: raise one percent per year

In Denver, Worries That the Fed Will Chill a Sizzling Recovery by Binyamin Appelbaum

Janet L. Yellen, the Fed’s chairwoman, and her colleagues have concluded that the economy is finally strong enough to grow with a little less help from the central bank. Indeed, they worry inflation will rise too quickly if they do not start raising interest rates. The first rate increase will be small, then the Fed expects to raise rates about one percentage point a year for the next few years.

Mogwai - Les Revenant

Yellen on inequality

Perspectives on Inequality and Opportunity from the Survey of Consumer Finances by Janet Yellen

Waldman on the rich

Hard money is not a mistake by Steve Randy Waldman

Sumner on Krugman

Word games: Krugman's odd definition of tight money by Scott Sumner

Piketty seminar

Crooked Timber Piketty seminar

Daenerys Targaryen

Baker on Krugman and Summer

Paul Krugman, Larry Summers, and the Fed's Unused Ammunition by Dean Baker

Paul Krugman and Larry Summers both have very good columns this morning noting the economy's continuing weakness and warning against excessive rate hikes by the Fed. While I fully agree with their assessment of the state of the economy and the dangers of Fed rate hikes, I think they are overly pessimistic about the Fed's scope for action if the economy weakens.

While the Fed did adopt unorthodox monetary policy in this recession in the form of quantitative easing, the buying of long-term debt, it has another tool at its disposal that it chose not to use. Specifically, instead of just targeting the overnight interest rate (now zero), the Fed could have targeted a longer term interest rate.

For example, it could set a target of 1.0 percent as the interest rate for the 5-year Treasury note, committing itself to buy more notes to push up the price, and push down the interest rate to keep it at 1.0 percent. It could even do the same with 10-year Treasury notes.

This is an idea that Joe Gagnon at the Peterson Institute for International Economics put forward at the depth of the recession, but for some reason there was little interest in policy circles. The only obvious risk of going the interest rate targeting route is that it could be inflationary if it led to too rapid an expansion, but excessively high inflation will not be our problem if the economy were to again weaken. Furthermore, if it turned out that targeting was prompting too much growth, the Fed could quickly reverse course and let the interest rate rise back to the market level.

Of course, it would be best if we could count on fiscal policy to play a role in getting us back to full employment (lowering supply through reduced workweeks and work years should also be on the agenda), but the Fed does have more ammunition buried away in the basement and we should be pressing them to use it if the need arises.

Krugman on Reich

Challenging the Oligarchy by Paul Krugman

Supergirl's laser eyes

The episode "Red Faced" has Kara dealing with her anger issues. She's told that humans are terrified of what will happen if Supergirl loses her temper. Her boss advises her to find out what the anger is about behind the anger. By the end of the episode Supergirl concludes that she's angry about having being denied a normal life. Instead, her parents sent her away before her planet expoded and now she has to be a super hero.

Instead of being angry all the time she vows to channel that rage as she does here, channeling it into her heat ray vision.

Bruce Rauner

A Wealthy Governor and His Friends Are Remaking Illinois by Nicholas Confessore

Adair Turner and monetary financing

Between debt and the devil by Adair Turner review by Giles Wilkes

Between Debt and the Devil by Adair Turner review – should the government start printing money? by Tom Clark

The Case for Monetary Finance – An EssentiallyPolitical Issue by Adair Turner (presented at the IMF's Annual Research Conference)

Budgetary sleight-of-hand by Ben Bernanke

Summers on productivity

Is It (just) Hysteresis? Disentangling the Cyclical from the Structural by Lawrence H. Summers

The left's green lantern problem

The Left's Green Lantern Problem by Suzy Khimm

People's QE, Adair Turner and John Cassidy

Why Not Just Print More Money by John Cassidy

Cecchetti & Schoenholtz against people's QE

Learning from Japan: It's Hard to End a Deflation by Cecchetti & Schoenholtz

Krugman on Neel Kashkari the new Minneapolis Fed President

Supply, Demand, and Neel Kashkari by Krugman

So, if the Minneapolis Fed felt the need to maintain conservation of NK, they could have chosen to replace Narayana Kocherlakota with a New Keynesian. Instead, they chose Neel Kashkari. Brad DeLong isn’t happy, and this Twitter exchange suggests that he has good reason to worry.

I’ve written before about the all-too-common fallacy of confusing demand with supply, of arguing that because we had a bubble — so that some component of aggregate demand was unsustainable — the economy as a whole was somehow producing more than its potential. Let me just repeat what I said then:

Just a brief note: one thing that keeps appearing in comments is the notion that because we had a bubble, in which some people were borrowing too much, the economic growth of 2000-2007 wasn’t “real” — that it was all a figment of our imagination. 

This is confusing demand with supply.

We really did produce all the goods and services counted in GDP; we were able to do that because we had willing workers, a sufficient capital stock, the right technology, and so on.
What is true is that some of the spending that created demand for those goods and services was debt-financed, and those debtors can’t continue to spend the way they did. But that doesn’t say that the capacity has somehow ceased to exist; it only says that if we want to keep the capacity in use, someone else has to spend instead. In other words, past growth wasn’t an illusion, or a fraud; but we need policies to sustain aggregate demand.

But now we are about to have a Fed president who says:

How’s this? Growth was artificially fast due to leveraging of econ. Trying to return to that rate thru def spend is futile.

In the words of Charlie Brown, AAUGH!

That word “artificially” is the real telltale, as is Kashkari’s description of Japanese monetary stimulus as “morphine.” It’s straight out of the liquidationist playbook, e.g. Hayek denouncing the use of “artificial stimulants” to fight the Great Depression.

So, great: we now have a liquidationist in a senior position in the Fed system.

Washintong Post editorial board is against People's QE

Big surprise.

The Washington Post is Confused About Central Banks and Democracy by Dean Baker

In an editorial railing against the Republican Congress for reducing the Fed's reserve fund (which is needed in case they forget how to print money), the Washington Post told readers:

"Central bank independence and fiscal transparency are attributes of a healthy democracy and have been throughout history. Many a banana republic, by contrast, has come to grief using its central bank to facilitate government deficit spending. Post-World War I Germany had a similar problem, if memory serves."

Apparently memory isn't serving the Post's editorial writers very well. The Bank of England did not independently set its monetary policy until 1997. Nonetheless, it somehow it managed to avoid hyperinflation and most people probably would still describe the U.K. as a democracy. There are many other examples of central banks, including the Fed during World War II and for six years afterwards, which were not independent of the elected government. In almost none of these cases did countries suffer from hyperinflation.

On the other side, independent central banks in the United States and Europe somehow managed to overlook enormous housing bubbles, the collapse of which sank their economies. In Europe, the collapse has actually caused more economic damage than the Great Depression. Incredibly, none of the bank officials responsible lost their jobs for their extraordinary incompetence.

Unlike dishwashers, truck drivers, or school teachers, independent central bankers are not held responsible for the quality of their performance. In fact, virtually all of the bankers responsible for this disaster will retire with pensions that are an order of magnitude larger than the Social Security checks that so enrage the Post's editorial writers.

how World War I ended

How did the first world war actually end? by  Paul Mason

...
The sailors’ organisation met in in the dark, kneeling between the stones of a war cemetery. This was no Potemkin-style, spontaneous outburst. With extreme order they took over the bridges, ran up red flags and pointed the guns of rebel ships at the hulls of those that did not rebel.
Mutinous sailors

On 4 November 1918 they armed themselves and set off, in their thousands, for the industrial centres of northern Germany. Jan Valtin, a participant, remembered: “That night I saw the mutinous sailors roll into Bremen on caravans of commandeered trucks – from all sides masses of humanity, a sea of swinging, pushing bodies and distorted faces were moving toward the centre of town. Many of the workers were armed with guns, with bayonets and with hammers.”

By 9 November, with workers swarming into the streets of Berlin, the Kaiser abdicated: only the declaration of a republic, with a Labour government and the promised “socialisation of industry”, prevented outright Soviet-style revolution.

For Hitler, the German workers’ role in ending the war became the “stab in the back”: it was his ultimate justification for eradicating the German labour movement after 1933. In the British imperialist version of events the Kiel sailors become useful ancillaries: Yanks and tanks turn the western front and, naturally, the Germans throw the towel in once their front starts to crumble.

But to social historians the German workers’ role in ending the war is no surprise. Because exactly 100 years ago this week, they had also turned out in their hundreds of thousands to try and prevent it starting. The German socialist party was a massive social institution – with libraries, schools, choirs, nurseries – and during the fatal slide to war they called their members onto the streets in every major city.

Then, under the pressure of war fever and fearing their institutions would be outlawed, the socialist leaders swung behind the war effort.

We know now, thanks to the publication of records and memoirs, that it was entirely possible to have stopped the first world war. Key members of the British cabinet were against it; large parts of the social elite in most countries, including Germany, were stunned and appalled by the unstoppable process of mobilisation.

But within 18 months of its outbreak, dissident German socialist MPs were leading mass strikes, demonstrations and riots against the war. Despite censorship, mobilisation and the natural moral solidarity people have with troops sent to the front, the German arms industry was repeatedly hit by strikes after 1916.

When they reached Berlin, the first thing the insurgent sailors did was try to seize its radio tower: their aim was to send a message of solidarity to Russian sailors at Kronstadt in the eastern Baltic Sea, who they had been fighting until a year before.

Larry Summers goes hetero

Larry Summers: Advanced economies are so sick we need a new way to think about them

An e-book containing the papers and presentations from the European Central Bank's central banking forum conference in Sintra, Portugal, is now available. ECB President Mario Draghi and his colleagues are to be greatly commended for running a forum that is so open to profound challenges to central banking orthodoxy.

The volume contains a paper by Olivier Blanchard, Eugenio Cerutti and me on hysteresis — and separately some of my reflections asserting the need for a new Keynesian economics that is more Keynesian and less new.

Here, I summarize these two papers.

Hysteresis effects

Blanchard, Cerutti and I look at a sample of over 100 recessions from industrial countries over the last 50 years and examine their impact on long-run output levels in an effort to understand what Blanchard and I had earlier called hysteresis effects. We find that in the vast majority of cases, output never returns to previous trends. Indeed, there appear to be more cases where recessions reduce the subsequent growth of output than where output returns to trend. In other words “super hysteresis,” to use Larry Ball’s term, is more frequent than “no hysteresis."

This finding does not in-and-of-itself establish the importance of hysteresis effects. It might be that when underlying growth rates fall, recessions follow, but that recessions have no causal impact going forward. In order to address this issue, we look at the impact of recessions with different precursors. We find that even recessions that are associated with disinflationary monetary policies or the drying up of credit have substantial long-run output effects suggesting the presence of hysteresis effects.

In subsequent work, Antonio Fatas and I have looked at the impact of fiscal policy surprises on long-run output and long-run output forecasts, using a methodology pioneered by Blanchard and Daniel Leigh. Because fiscal policy effects operate primarily through aggregate demand, this provides a way to avoid the causation question. We find that fiscal policy changes have large continuing effects on levels of output suggesting the importance of hysteresis.

I was struck that in a vote taken at the conference, close to 90 percent of the participants indicated that they believe there are significant hysteresis effects. While there is much more work to be done, I believe that, as of right now, the right presumption is in favor of hysteresis effects, despite their exclusion from the standard models used in almost all central banks.
Toward a new macroeconomics

My separate comments in the volume develop an idea I have pushed with little success for a long time. Standard new Keynesian macroeconomics essentially abstracts away from most of what is important in macroeconomics. To an even greater extent, this is true of the dynamic stochastic general equilibrium (DSGE) models that are the workhorse of central bank staffs and much practically oriented academic work.

Why? New Keynesian models imply that stabilization policies cannot affect the average level of output over time and that the only effect policy can have is on the amplitude of economic fluctuations, not on the level of output. This assumption is problematic at a number of levels.

First, if stabilization policies cannot affect average levels of employment and output over time, they are not nearly as important as if they can. Beginning the study of stabilization with this assumption takes away much of the motivation for doing macroeconomics.

Second, the assumption is close to absurd. It is surely reasonable to assume that better policy could have avoided the Depression or the huge output losses associated with the financial crisis without having shaved off some previous or subsequent peak.

Third, contrary to the now common view that macroeconomics is best understood by studying the stochastic properties of stationary time series, the most important macroeconomic events are in some sense one off. Think of the Depression or the Great Recession or the high inflation of the 1970s.

The problem has always been that it is difficult to beat something with nothing. This may be changing as topics like hysteresis, secular stagnation, and multiple equilibrium are getting more and more attention.

As well they should. U.S. output is now about 10 percent below a trend estimated through 2007. If one attributes even half of this figure to the effects of recession and assumes no catch up on this component until 2030, the cost of the financial crisis in the U.S. is about one year’s gross domestic product. And matters are worse in the rest of the industrial world.

As macroeconomics was transformed in response to the Depression of the 1930s and the inflation of the 1970s, another 40 years later it should again be transformed in response to stagnation in the industrial world.

Maybe we can call it the Keynesian New Economics.

more private investment?

Jared Bernstein:

"Something is blocking the private sector investment channel and, as I note in the piece, many economic scholars are pondering this puzzle–Brad DeLong provides an excellent rundown of their thinking here."

JW Mason's first piece in The Baffler.

Farmer on helicopter drops

A Bridge Too Far? by Roger Farmer

Bernstein, Wren-Lewis and macro policy

Full employment: A bipartisan goal that’s missing from the candidates’ debates by Bernstein

There are two facts you should know about full employment. First, as the bars in the figure above show, since the late 1970s, we’ve been at full employment only 30 percent of the time (see the data note below for an explanation of how this is measured). For the three decades before that, the job market was at full employment 70 percent of the time.

Central bankers and their irrational fear by Simon Wren-Lewis

Continuum and possible futures

Continuum Actually Managed to Have a Pretty Sweet Ending by Charlie Jane Anders

The Dreamwork of Humanity by DeLong

In popular entertainment ... the Syfy TV series Continuum just ended on an upbeat note. 2077 will look more like Star Trek's one-world government, replicator communism and the Corporate Congress will never have existed thanks to the time-travelling fascist "Protector" Keira Cameron. In the Wachowski siblings' movie Jupiter Ascending, on the other hand, Capital has expanded across the universe, working through family "houses" of "entitled." Galaxies of planets haves succumbed to Piketty's death spiral as the .000000000001 percent utilize sentient beings as resources for profit as if they were Soylent Green or batteries for the Matrix's AIs. He who controls the populated planets, controls the universe.

As a revolt erupts among the central planners at the FOMC, more and more one hears about the possibility of "cold fusion" (see Willem Buiter and Citigroup's Steven Englander) or a "Peoples' QE" (Jeremy Corbyn). Simon Wren-Lewis described it as "democratic helicopter money." "Investment that also boosts the supply side is likely to be a far more effective form of stimulus than cheques posted to individuals."

Cold fusion raises the possibility of unprecedented leaps in "productivity" which would provide immense help in the campaigns to avoid global warming and the Piketty death spiral.

And yet it draw opposition from the likes of Nick Rowe and David Beckworth. Why?

Bernanke, Glasner, and long-term rates

Bernanke’s Continuing Confusion about How Monetary Policy Works by David Glasner

Over my four years of blogging — especially the first two – I have written a number of posts pointing out that the Fed’s articulated rationale for its quantitative easing – the one expressed in quote number 1 above: that quantitative easing would reduce long-term interest rates and stimulate the economy by promoting investment – was largely irrelevant, because the magnitude of the effect would be far too small to have any noticeable macroeconomic effect. 

In making this argument, Bernanke bought into one of the few propositions shared by both Keynes and the Austrians: that monetary policy is effective by operating on long-term interest rates, and that significant investments by business in plant and equipment are responsive to relatively small changes in long-term rates. Keynes, at any rate, had the good sense to realize that long-term investment in plant and equipment is not very responsive to changes in long-term interest rates – a view he had espoused in his Treatise on Money before emphasizing, in the General Theory, expectations about future prices and profitability as the key factor governing investment. Austrians, however, never gave up their theoretical preoccupation with the idea that the entire structural profile of a modern economy is dominated by small changes in the long-term rate of interest.

market monetarists criticize People's QE

The oil, gas, coal and nuclear industries want to prevent a cold fusion breakthrough!

Fiscal offset of silly QE by Nick Rowe

People's QE Has Been Tried Before and Failed by David Beckworth

Bernstein, Brainard, and Tarullo

Fed Fight! by Jared Bernstein

Kervick troll

Kervick:

"Yes, Krugman is a hack. These days, he's only about half a notch up from Politico. He hasn't had an interesting new idea since some time in the late 80's."

Lael Brainard and Duy

Economic Outlook and Monetary Policy by Lael Brainard

Brainard Drops A Policy Bomb by Tim Duy

Home Fires Theme Song

Trekonomics

“You see, money doesn’t exist in the 24th century” by Isabella Kominska

As any good Trekkie will tell you, the economics of the 24th century are somewhat different. Why? Because the acquisition of wealth is no longer the driving force in people’s lives. They — Ferengi excluded — work to better themselves and the rest of humanity.

Except, the bummer is, that’s probably a major over-simplification.

A post-scarcity economy — a.k.a. the economic reality of an abundant system — may not necessarily lead to a utopian world. At least if we go by the meritocratic example of the fictional Star Trek society.

In other words, here’s a post about how I attended a New York Comic Con panel on the economics of abundance — featuring Paul Krugman and Brad Delong, Annalee Newitz (i09), Chris Black (Enterprise writer), Felix Salmon and Manu Saadia, author of the new book Trekonomics — and learnt that even if we did have it all one day, chances are, highly-popular cosplaying events would still be capped by the natural limits of space-time.

Thus, while the acquisition of wealth might not drive people, the acquisition of access rights to highly prestigious events (a comic-con ticket commodity forward curve of its own, if you will) will continue to do so. And if not that, the more basic acquisition of connections to people who “know the right people who know the secret passwords that can sweet-talk you through the gate-keepers”. Plus ca change.

Yes. Sometimes it’s very good indeed to be an FT Alphaville reporter.

Here follows a truncated transcript from the panel, purposefully excluding our very ridiculous question to the panel about whether or not the Federal Reserve will have finally raised rates by the 24th century.

MANU: The project for the book, it started out drinking beer with Chris. We were discussing about whether there is a book about Star Trek economics because there is a book about everything to do with Star Trek.

In the book I’ve tried to step out of that mindset, and tried to actually describe how it works. And I’ve discovered some very surprising things.

The biggest thing, I believe, that I got out of researching the book and writing it, is that the post scarcity in Star Trek is not driven by technologybut a policy choice. And this is where having such a stellar economic panel to discuss this comes in.

FELIX: What is post scarcity?

BRAD: Well 400 years ago, in almost all human societies being rich relative to your neighbours mattered a lot. If you were poor, especially poor and female, chances were you weren’t getting the calories you needed to reliably ovulate, and chances were your children weren’t getting the nutrients that they needed for their immune systems to be protected against the common cold. 400 years ago the great bulk of humanity lived lives that were nasty, brutish, short and they were hungry pretty much all the time. And when they weren’t hungry they were wet, because the roof leaked, and when they weren’t wet they were probably cold because damp proofing hadn’t been invented.

Now we, here, in the prosperous middle class in the North Atlantic are moving into another society and Gene Roddenberry tried to paint our future by saying wait a minute what’s going to happen in three centuries? In three centuries we are going to have replicators. Anything material, gastronomic that we want indeed anything experiential with the holo-deck we we want we are going to have. What kinds of people will we be then and how will we live? And indeed, we are quite ahead on that transition already.

Whenever I go say, to the middle of the country, I find myself terrified because I’m rarely the fattest person in the room, which means right now in the United States what used to be the principle occupation of the human race — farming — we are down to 1 per cent of our labour force growing essential nutrients because time spent growing four-inch egg plants which are harvested isn’t really food that’s art, and we have about three times as many people in our medical and health support professions working to try and offset the effects of excessive calories. We are now rapidly approaching a post scarcity economy not just for food but if you go and look at containers coming in from China with respect to things physically made as well. And that’s one of the things Star Trek is about.

ANNALEE: One of things I find interesting about Star Trek is that it does try to imagine a post-scarcity economy with no money, people don’t work because they have to but because they want to, but there are all these hints that we get — especially in Star Trek the next generation, my favourite series — that there’s a lot of ways that the post scarcity economy is supported by other types of economies.

Economies that we might consider to be part of the past, and that’s why one of the most interesting episodes to think about is “measure of a man” from the second season of Next generation where the question comes up whether Data, our favourite android with a positronic brain, is actually his own person or is in fact property. And this is a question which comes up again in Voyager when the holographic doctor who is unquestionably an autonomous human being is also considered property and he writes basically the communist manifesto, and encourages all these other holograms which are being horribly oppressed and enslaved to have a revolution. And this is going on at the periphery of Star Trek all the time.

Any time you get off the Enterprise, the wonderful utopian Enterprise, which did in fact inspire me to become a Marxist as a student because I did believe “wow, we really could get to a world which was better than this one” – we are constantly being reminded that there may be other systems of labour, like slavery or things that are closer to wage-slavery, which are supporting this wonderful life that the Federation enjoys and which Picard and team enjoy on their really clean ship. So that’s one of the things about Star Trek is that it allows us to have that kind thought experiment of what would it be like if we did get past capitalism?

Or if we did have a system of capitalism which was more restrained by government and regulation — whatever the hell the Federation is, the government, UN — but at the same time, forced to recognise that there are these differences in what people have access to, and intense labour they perform and some of them are being treated like property. Some of them are chattel. So that’s always the good part of the thought experiment?

FELIX: Is that what the writers were thinking about? Or how did people come up with these interpretations.

CHRIS: Yes. Well. It’s funny. We didn’t think about a lot of that stuff consciously. And I worked on Enterprise, so it was at the end of the long-run of the franchise. That universe had been well established. To hear this conversation, to hear this book has been written so thoughtfully and profoundly is really gratifying. There were larger issues that came into play than people even consciously thought about. The practical reality of trying within the production schedule hours of network television a year, you were just always scrambling to get good entertaining scripts written in front of the camera. We were first and foremost trying to write what we thought were thoughtful exciting adventure stories for Captain Archer and the crew so we weren’t consciously thinking about how these characters were being motivated by the needs of a post scarcity economy. But because that universe had already been established, and we all wanted to be respectful of that universe, and grateful — we took the responsibility of keeping Gene’s vision intact and moving it forward. Very conscious of not violating those rules. The answer is no. But we were very conscious of keeping those characters in the world they were established.

FELIX: Does post-scarcity economics even make sense?

PAUL: I watched the original series and a bit of the next generation and then dropped off. I’m more of an Asimov guy, what can I say. But, the question is… do we accept the premise of a post-scarcity society? First of all there’s a long history of people saying, we’re much richer than our ancestors were and if you go just a little bit further you’ll get to the point where there won’t be any economic question, post scarcity. Keynes wrote an essay about that saying that if the world got as rich as it is right now there would no longer be money, and John K Galbraith wrote that in a new industrial state that the standard of living of the average American would be so high that it’s basically only propaganda that would make them want more, to which Robert Solow responded, well it doesn’t look that high to me but maybe those things look different from where Galbraith vacations.

So, in Star Trek they have a replicator that can make any thing you want. But it makes any thing you want. Even now, we spend only 30 per cent of our income on goods the rest is for services, and the replicators won’t help with that. We have fewer manufacturing workers but lots and lots of nurses, so. So that’s the point. We can imagine a world where all services are provided as well. We have robots or something to do the services. But in order to do the full range of stuff we want they have to be very intelligent things in which case aren’t those then people? So the actual issue is that a world where you have servitors of some kind who will give you everything you want is a world where it’s very hard to tell the difference between servitors and slaves. So I think there’s arguably a dark side to the abundance theory.

The other thing to say, there’s this great section where Picard lectures a man from the 21st century, saying we’ve moved to a world where people don’t seek money they seek reputation and honour. Well Brad and I live in the academic world, where pretty much that’s how it works….

FELIX: So the post-scarcity economy is not utopian, it’s actually not that pleasant this meritocracy of the Federation.

MANU: It’s horrible.

It’s not horrible horrible. But I always thought Star Trek looked like a weird cross between a faculty club and the Red Cross. It’s very humanitarian, but I know for a fact the professors here know what I’m talking about. The world of meritocracy and academia is extremely harsh and cut throat. You’re on top one day, but you’re always afraid and watching your back because someone else is going to come and unseat you. So what you see on the show, the next generation, is really the 1 per cent. Those who are the ultra achievers in that sense. You barely see the other side of it, the 99% who lead lives of comfort and abundance but not necessarily the most interesting. So it seems to me to be very harsh. I always thought that as a kid watching the Next Generation, I always identified very much with Wesley Crusher, because he lived in a world where he had to achieve and he had to become the person that the adults wanted him to become and he actually didn’t want to. That’s the part that’s hard. You’re driven to achieve but it’s not at all clear you will achieve. Which is the problem of a meritocratic world. It’s not all fun and games.

FELIX: It’s very hard for a meritocratic world to be utopian, so what about the 99% of people who live on earth, are they happy?

CHRIS: Are they happy? I don’t know. What we focused on was the adventures of the people on the ship. This doesn’t exactly answer your question, but in terms of the meritocracy of it all you are seeing people at the top of their game. This is the 1/1000th of the 1 per cent who get to go to out of space. That was the mandate of the show. The funny thing was that there was an inherent conflict in trying to write the show, you had a group of people — Star Fleet officers — and this was a mandate given to us — that these people have a singular purpose in mind, they get along and they don’t get into petty conflicts and arguments which immediately took the drama out of the show, meaning everything had to come from an external source. And you didn’t exactly want every threat every week and week out to be about some hostile greedy or malicious alien race. What you wanted the drama to come from within the ship, from conflict between these characters that didn’t always get along. If you look at the original series, Spock and McCoy didn’t get along at all. McCoy would sometimes say the most outrageous racist things to him. There was mutual respect and friendship at the end of the day, but there was also amazing conflict.

FELIX: Is there anything utopian about meritocracy? 2016 is not the only anniversary of Star Trek, but also the 500th anniversary of Utopia by Thomas Moore. Are we, as far from utopia today as we were 500 years ago? Or is it just this thing that there’s always going to be this conflict. Or is there something different now? Thanks to star trek there are policy choices which mean we can get through it?

BRAD: First let me put in a plug for hyper intellectualised prosperous academic meritocracies. My career nadir, when Larry Summers looked at me across the table at the Treasury in early 1995 and said how did you get what the demand for pesos would be after NAFTA so wrong Brad? The worst analysis I have ever conducted as an economist. That burns considerably less than watching your children starve to death. We are problem solving, puzzle solving, status seeking creatures, who fortunately very much like to get involved in gift exchange relationships with each other so that we can all hang together in a 7.2bn society.

So we will find puzzles to solve and we will find sources of stresses and conflict. But the sharp point of what we’re all afraid of is very different in a post scarcity society. The plutocracy of New York are more interested right now in who happens to have the best apartment with a better view of central park than in where the next meal is going to come from. That is a considerable gain. We will make our status differences important and powerful to us psychologically, but we should be able to move beyond that. As Adam Smith wrote, the interesting thing about humanity and the strivers is that the strivers work like dogs their entire life, so that when they are retired they can sit in the sun so and be happy and comfortable and they could have done that anyway in their 20s, and they would have got more fun out of it.

FELIX: Are we always going to be competing for positional goods? Or could a post-scarcity world change human psychology?

PAUL: I think. First of all. When listening to Brad I think of the old line about how fights in academia are so bitter because the stakes are so small. And when the stakes are small. Aside from ego there is nothing at all. And even that is always going to be a really restrictive universe. So even people who are engaged in ferocious status competition, these are the people that are going to be featured on a TV show because it’s interesting, but the 99.9 per cent of the Federation are people who are doing other things and what exactly — I’m not sure it makes good drama — but it’s kind of interesting to ask what exactly would they be doing? So where Picard explains what motivates us, that’s actually what motivates people like him. And there are very few people like him. So what is the rest of the civilised universe doing? They’re enjoying life and doing cosplay and things. But it would probably be an interesting thing.

BRAD: But even that would be a source of status. Have you seen the stuff Annalee has been posting?

ANNALEE: And I’m cosplaying as an economist right now.

One of the things that’s really interesting about what you were raising Paul with what happens with ordinary people is that there’s this really funny story about a timeline in Star Trek which is established in the next generation era, there is a whole different timeline, so what happens is that earth is plunged into a war and in the first episode of next generation Q torments the crew by saying we’re going to go back to the world of our future, which is a medieval world, ruled by religious creepozoids. It’s basically this cyclical view of history, where this highly industrial organisation has fallen back to a medieval state, they’re living in extreme poverty, there’ disease and famine, and then some white dude figures out how to build a rocket ship by the skin of his teeth, erupting out of this medieval world of scarcity. Not coming out of a hyper industrial society, and then the Vulcans arrive. So I am left wondering is whether what really happens to humans as we transition to this post scarcity world, that basically we are colonised by Vulcans. So really it’s not that humanity evolves, it’s basically we’re colonised.

BRAD: It’s not colonisation, we’re pets.

ANNALEE: That’s colonisation, buddy.

FELIX: I was colonised by my cat a long time ago.

MANU: I always took the more optimistic view that we are the Vulcans, or we have to become the Vulcans. If we are going to be colonised I’d rather be colonised by Vulcans anyway.

BRAD: Nimoy always said he played Spock not as a being without emotions but a being whose emotions were so terribly suppressed he could not give into them at all. So Vulcans were a civilisation that was desperately trying to figure out how to actually behave in a civilised manner.

CHRIS: I think the interesting thing about Spock was that he was only half Vulcan. You had the best of both worlds, this character in conflict. This sense of what humans wanted to be and what they were fighting against being. This character is not devoid of emotions but needs to keep them under control, needs to keep them in check.

FELIX: Is that utopian or not? This world where we have emotions but we are constantly trying to keep them tacked down and never showing them doesn’t sound very utopian to me.

CHRIS: Conflict is the source of drama, and Spock was always in conflict with himself.

PAUL: People have an amazing capacity to be unhappy. If you look at utopia the problem isn’t scarcity, it’s people.

ANALEE: The Iain M Banks culture novels are another example of a post-scarcity world driven by a lot of the same problems we see in Star Trek, where at the edges of these beautiful ships there’s slavery and imperialism and racism, and people are constantly struggling with those issues even thought they can transcend them at any time.

PAUL: Iain M Banks, the culture novels are amazing. Everyone should read them.

BRAD: Reuse your weapons first. Read Use of Weapons first. [edit.]

PAUL: All the novels are really concerned with the fringe of the fringe of the fringe. Special circumstances, which is that the one part of society which isn’t functioning like the rest. But it does do what Star Trek does, have someone who is recruited from outside who gets to wander around one of these ships and gets to see what life is like for ordinary people, which is, to have life without slavery, there are in fact these super-intelligent minds, who can basically supply all the needs for the organic guys by basically — it barely requires a finger nail’s worth of attention. They can give you everything you need without worrying about it. People do seem to be somewhat more balanced in that kind of environment than they probably would be in reality.

ANALEE: But also everyone’s a cyborg. They all have neural nets. They can restrain their emotions.

MANU: To understand Star Trek’s economics you need to go back to Asimov, because it’s very much very directly connected, not so much the Foundation part but the robot stories. In the sense that at least if you read the Robots of Dawn and the later novels, Asimov describes a society beyond earth where robots take care of everything and you have these people living on their gigantic estates, and are enjoying life and not doing much.

PAUL: And they’re completely neurotic screwed up people. The luxury and role of that situation.

BRAD: Those who are not maladjusted people become Star Trek officers and compete for status. Perhaps if you really want to be looking at what their lives are like we should be looking at regency romances. A previous culture of abundance where people find very important and interesting things for themselves to do. Even though there is no serious conflict in a regency romance world. If you want to you can say there are three spheres of regional conflict: fear of violent death, scarcity of resources and who is going to sleep with whom. But what you’ll find in a society of abundance, like in a regency novel about the aristocracy, is that who is going to sleep with whom becomes the focus of the plot. The secondary focus being a demonstration of human excellence via proper appreciation of fashion.

PAUL: It’s cosplay, just a slightly different version.

ANNALEE: But don’t you think it’s possible Brad that what most ordinary people are doing is living on [inaudible] after having been screwed over by the Kardashians and now the Federation is there screwing them over — or maybe that’s more what society is like?

BRAD: No, that’s no longer a society of abundance. That’s the world we have today, in which we have the upper middle class of America. In the 7.2bn lives 2bn of them lead lives which are frankly indistinguishable from those of our pre-industrial ancestors, and the other 4.5bn live lives that look to us like the standard of life people had in the 1970s and 1950s, 1920s and 1880s, but with all their TVs and smartphones they can see us. So I got off the plane today from Lima, Peru. A wonderful city, a wonderful culture, lots and lots of people — all of them working at least as hard as anyone in New York, only about 1/8th as rich. And we may be approaching material abundance in terms of manufactured goods, and calories and nutrients, but they are certainly still very far from that.

2008

The Courage to Act in 2008 by David Beckworth

The Man in the High Castle

The Man in the High Castle (TV series)

According to the NYTimes, Amazon is run like a fascist state. But they allow you view to the pilot free. The show will be available Nov. 20th.

Elementary - King of Pain

cold fusion - unconventional monetary policy

"There's no such thing as "out of ammo" by Scott Sumner

‘Cold Fusion’ Is Citi's Answer to Fading Central Bank Firepower by Simon Kennedy

...
The medicine may nevertheless need to be stronger than the traditional prescription. If the world economy enters a downdraft, Steven Englander, global head of G-10 FX strategy at Citigroup Inc., proposes a more revolutionary response, akin to the “helicopter money” once advocated by Milton Friedman. 

In what he calls “cold fusion,” politicians would cut taxes and boost spending. Central banks would then cover the resulting increase in borrowing by purchasing more bonds as part of a commitment to permanently expand their balance sheets. The easier fiscal policy would be covered by QE Infinity. 

“Politically it is difficult for central banks to outright endorse monetization of government debt, but faced with another slump and armed with ineffective policy tools, we expect that central banks will quickly give the wink and nod to fiscal measures,” Englander said in a report to clients last week. 

The upshot would be greater purchasing power would be injected straight into the economy, increasing activity and inflation. Long-term bond yields would rise, yet short-term yields adjusted for inflation would turn negative. 

Fiscal Expansion 

“Increasingly the absence of fiscal policy is viewed as one of the reasons for a less than satisfactory recovery,” said Englander. “With rates at zero, fiscal policy will be needed to offset any negative shock that hits global economies.” 

Michala Marcussen, head of global economics at Societe Generale SA in London, agrees. 

“In a risk scenario, we believe policy makers, faced with the abyss, would take the next step into unorthodox policy, namely fiscal expansion,” she said. “Clearly not the risk that bond markets have in mind.”

Anonymous troll

"As I wrote two years ago, the Fed will never raise rates."

Charles Evans

Thoughts on Leadership and Monetary Policy by Charles Evans

NGDP targeting in Japan and raising the inflation target

How Practical is Japan's New NGDP Target? by David Beckworth

Understanding the current Fed and the problems with ftnt 14 by Jared Bernstein

Yellen on Inflation Dynamics

Inflation Dynamics and Monetary Policy by Janet L. Yellen

Emmys and Game of Thrones

Game of Thrones won for Best Drama Series. Benioff and Weiss won for Best Drama Writing for "Mother's Mercy." Peter Dinklage won for best supporting actor. David Nutter won for Best Drama Directing for "Mother's Mercy."

Tatiana Maslany was nominated for Best Drama Actress but didn't win.  The Knick was nominated. Veep won a bunch also. Silicon Valley was nominated. Better Call Saul and Bob Odenkirk were nominated.

And Evan Rachel Wood and Olivia Wilde were on HBO's Dolly and Em, two of my favorites.

Corbyn and Krugman and rate rage

Here's the real problem with Jeremy Corbyn's wacky money-printing scheme by Ryan Cooper

I don't completely agree with him.

Krugman  and Rate Rage.

Rate Rage in 1932

Milton, Money, and Interest Rates

More On The Political Economy Of Permahawkery

Is QE good or bad for capital, for rentiers, whatever? No matter — it’s bad for bankers, because it leads to a compression of the net interest margin, the spread between deposit rates and lending rates. And that is why there’s so much agitation for rate hikes on the part of finance.

Rate Rage

The Rage of the Bankers

Dean Baker, Mason, DeLong, Krugman: bankers: evil or stupid

The Argument for Higher Interest Rates: Are the Bankers Evil or Stupid? by Dean Baker

I see my friends Paul Krugman and Brad DeLong are arguing over whether the pressure from the banking industry for the Fed to raise interest rates is the result of their calculation that higher interest rates would raise their profits or is it just ignorance of the way the economy works. Krugman argues the former and DeLong the latter. I would mostly agree with Krugman, but for a slightly different reason.

I don't see the clear link, claimed by Krugman, between higher Fed interest rates and higher net lending margins for banks (the difference between the interest rate they charge on loans and the interest rate they pay on deposits). Such a link may exist, but his data don't show it. On the other hand, I think it is still not hard to make a case for banks' self-interest in following a tight money policy.

An unexpected rise in the inflation rate is clearly harmful to banks' bottom line. This will lead to a rise in long-term interest rates and loss in the value of their outstanding debt. This is very bad news for them.

While we (the three of us) can agree that such a jump in inflation is highly unlikely in the current economic situation, it is not zero. Furthermore, a stronger economy increases this risk. If we assume that the banks care little about lower unemployment (they may not be bothered by lower unemployment, but high unemployment is not something they wake up every morning worrying about), then they are faced with a trade-off between a greater risk of something they really fear and something to which they are largely indifferent. It shouldn't be surprising that they want to the Fed to act to ensure the event they really fear (higher inflation) does not happen. Hence the push to raise interest rates.

I suspect also there is a strong desire to head off any idea that the government can shape the economy in important ways. There is enormous value for the rich to believe that they got where they are through their talent and hard work and that those facing difficult economic times lack these qualities. It makes for a much more troubling world view to suggest that tens of millions of people might be struggling because of bad fiscal policy from the government and inept monetary policy by the Fed.

Interest Rates and Bank Spreads by J.W. Mason

The Fed is powerless

Roger Farmer:

From January of 2007, through September of 2008, expected inflation fluctuated between two percent and three and a half percent. When Lehman Brothers declared bankruptcy in September 2008, expected inflation fell by nearly eight hundred basis points in the space of two months and by October of 2008 it reached a low of negative four and half percent.

Immediately following the Federal Reserve purchase of one point three trillion dollars of new securities, expected inflation went back up into positive territory.