budget deal - unprecedented austerity

The Budget Deal Is a Win for Democrats. And the GOP doesn't know it yet by Noam Scheiber

Unprecedented Austerity by Krugman

"You can see that there was a brief, modest spurt in spending associated with the Obama stimulus — but it has long since been outweighed and swamped by a collapse in spending without precedent in the past half century. Taking it further back is tricky given data non-comparability, but as far as I can tell the recent austerity binge was bigger than the demobilization after the Korean War; you really have to go back to post-World-War-II demobilization to get anything similar.

And to do this when the private sector is still deleveraging and interest rates are at the zero lower bound is just awesomely destructive."

QE risks

A Debate on the Risks of Quantitative Easing: Stan Fischer and Glenn Hubbard and Ben Bernanke vs. Joe Gagnon: Thursday Focus by DeLong

interest on excess reserves

Alan Blinder: The Fed Plan to Revive High-Powered Money: "Don't only drop the interest paid rate paid on banks' excess reserves, charge them:** Unless you are part of the tiny portion of humanity that dotes on every utterance of the Federal Open Market Committee, you probably missed an important statement regarding the arcane world of 'excess reserves' buried deep in the minutes of its Oct. 29-30 policy meeting. It reads: '[M]ost participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage.' As perhaps the longest-running promoter of reducing the interest paid on excess reserves, even turning the rate negative, I can assure you that those buried words were momentous. The Fed is famously given to understatement. So when it says that "most" members of its policy committee think a change 'could be worth considering', that's almost like saying they love the idea. That's news because they haven't loved it before..."

(via DeLong)

David Simon

David Simon: 'There are now two Americas. My country is a horror show'

The Wrong Debate: Helicopter Drops vs. Quantative Easing by David Beckworth

less bad fiscal policy

Today in Fiscal Policy: Is There a Little Deal in the Offing? by Jared Bernstein

The market monetarists and me (Updated) by Izabella Kaminska

secstags

Secular Stagnation Arithmetic by Krugman

Still playing around with the question of secular stagnation. Based on some recent conversations, it seems to me that it’s useful to put some numbers to the issue – to quantify, at least roughly, the hole that seems to have developed in sustainable demand.

In doing all this, the key point is NOT to focus on events since crisis struck; this is not a case of taking a business-cycle slump and imagining that it will last forever. Instead, the argument is that the sources of demand during the good years – the Great Moderation from 1985-2007 – are not going to be available even when the aftereffects of crisis have faded away.
...

CBO thinks that we’re looking at potential growth around 1 percentage point slower than it was during the Great Moderation. To think about how this affects demand, consider the simple “accelerator”, in which producers, other things equal, invest enough to keep the ratio of capital to output constant as the economy grows. Here’s the ratio of fixed assets to GDP:

It’s somewhat above 2. This says that other things equal, a 1 percentage point drop in potential growth would reduce investment spending by 2 percent of GDP.

So between the end of rising leverage and slowing potential growth, we seem to be depressing aggregate demand by 4 percentage points. That’s a lot!
...

The average real rate during the GM years was 1.9 percent. Given the factors I’ve described, it seems hard to avoid the conclusion that the average real rate looking forward will have to be negative. If inflation stays relatively low, e.g. 2 percent, this would mean an economy that often, perhaps usually, finds itself in a liquidity trap.

What might change this scenario? One key point could be trade. Before the 1980s, the US had more or less balanced trade. During the Great Moderation era, it ran an average current account deficit of 3 percent of GDP. Eliminating that deficit somehow would reverse most of my shortfalls. I would say, however, that the most likely way to reduce the deficit would be via a weaker dollar, achieved through low real interest rates, achieved in turn with a higher inflation target.

economics and interest rates

I have no idea if JW Mason is right here:

In general, I do think the secular stagnation conversation is a real step forward. So it's a bit frustrating, in this context, to see Krugman speculating about the "natural rate" in terms of a Samuelson-consumption loan model, without realizing that the "interest rate" in that model is the intertemporal substitution rate, and has nothing to do with the Wicksellian natural rate. This was the exact confusion introduced by Hayek, which Sraffa tore to pieces in his review, and which Keynes went to great efforts to avoid in General Theory. It would be one thing if Krugman said, "OK, in this case Hayek was right and Keynes was wrong." But in fact, I am sure, he has no idea that he is just reinventing the anti-Keynesian position in the debates of 75 years ago. 

The Wicksellian natural rate is the credit-market rate that, in current conditions, would bring aggregate expenditure to the level desired by whoever is setting monetary policy. Whether or not there is a level of expenditure that we can reliably associate with "full employment" or "potential output" is a question for another day. The important point for now is "in current conditions." The level of interest-sensitive expenditure that will bring GDP to the level desired by policymakers depends on everything else that affects desired expenditure -- the government fiscal position, the distribution of income, trade propensities -- and, importantly, the current level of income itself. Once the positive feedback between income and expenditure has been allowed to take hold, it will take a larger change in the interest rate to return the economy to its former position than it would have taken to keep it there in the first place. 

There's no harm in the term "natural rate of interest" if you understand it to mean "the credit market interest rate that policymakers should target to get the economy to the state they think it should be in, from the state it in now."And in fact, that is how working central bankers do understand it. But if you understand "natural rate" to refer to some fundamental parameter of the economy, you will end up hopelessly confused. It is nonsense to say that "We need more government spending because the natural rate is low," or "we have high unemployment because the natural rate is low." If G were bigger, or if unemployment weren't high, there would be a different natural rate. But when you don't distinguish between the credit-market rate and time-substitution rate, this confusion is unavoidable.

DeLong and Mason tweet on subject

Third Way and Warburg Pincus

Elizabeth Warren and Centrist Democrats Are Already at War by Jonathan Chait

If you go to the Third Way link he provides, a number of the top officers and trustees come from Warburg Pincus, where Geithner ended up.

Borgen and The Returned

Søren the economist rock star! Birgitte!

AV Club reviews "The Election" from Borgen

AV Club reviews "Lucy" from The Returned

Rowe, Harless Williamson and QE

Does house building cause house price inflation? Our Sokal hoax by Nick Rowe

Harless is in comment section making same points below:

Andy Harless tweets on Stephen Williamson (last tweet below is most recent):

"Increasingly I think the key to Williamson's QE->deflation result is neither AS nor abuse of RatEx but a heroic fiscal policy assumption...."

Williamson's heroic fiscal policy assumption results from the fact that he is trying to model a sticky price world w a flexible price model

I call the QE->deflation controversy a draw. Krugman, Rowe, @delong, et al are wrong about what particular silly thing Williamson has done.

DeLong responds to above with ".@AndyHarless you need to add coherence mix to understand Williamson, and adding it in different ways produces different silly things"

Harless: If you think fiscal policy determines the price level, it's reasonable to expect *eventual* deflation in response to a ZLB monetary stimulus

Realistically, though, if QE causes deflation, it does so by causing today's prices to rise ("inflation") relative to future prices.

Now that (I think) I understand what's going on, I no longer find Williamson's result counterintuitive, just his assumptions too unrealistic

If the world really worked according to Williamson's assumptions, then deflation is exactly what I'd expect from QE."

Stephen Williamson's blog

Noah Smith's summary of bloggers

David Glasner's take

how to dance to Radiohead

One of my favorites: M83 - Midnight City

marginal propensity to consume and aggregate demand

Standards of evidence by Steve Randy Waldman

Stephen Williamson Gets Stuck at the Zero Lower Bound by David Glasner

Mandela

Nelson Mandela, South Africa’s Liberator as Prisoner and President, Dies at 95

Mandela, My Countryman by Nadine Gordimer

interview with Neville Alexander

John Burns:

The day following his release, when Mr. Mandela met hundreds of reporters for his first news conference in nearly 30 years in the terraced garden of Archbishop Desmond Tutu’s residence in Bishopscourt, in the lee of Table Mountain, his message of reconciliation found its most powerful expression...

But it was an act of particular kindness that remains lodged most powerfully in the memory. As the news conference unfolded, a white reporter stepped forward and identified himself as Clarence Keyter, the chief political correspondent of the Afrikaans-language service of the state-run broadcasting monopoly, SABC. As he asked his question, Mr. Keyter seemed deeply apprehensive — perhaps not surprising, considering that the SABC had served unswervingly, for decades, as the legitimizing voice of apartheid.

Sensing Mr. Keyter’s unease, Mr. Mandela rose from his seat, walked forward a dozen paces, shook the reporter’s hand and thanked him, saying that in his last years in prison, when he had been given a radio, he had relied on Mr. Keyter’s reports to learn “what was going on in my country.” Mr. Keyter, stunned, had tears welling in his eyes. The rest of us knew then, if we didn’t before, that in Mr. Mandela, the country had a man who was capable — if anybody was — of healing the historical wounds that had made South Africa so tragic for so long.

QE

Does QE cause deflation? by Noah Smith

Bernanke's June taper-talk caused interest rates to rise.

Another trolly post by Smith:

When teaching econ, start with the parts that work 

edit: added:

How should we empirically verify whether QE increased or decreased inflation?  by Tony Yates

faster third quarter growth, mostly due to inventory build-up

Smart GDP Pop but a Lot of It Is Noisy Inventories by Jared Bernstein
 
U.S. Growth Faster Than Estimated as Businesses Stock Up

The economy expanded much faster than first thought in the third quarter, as the government on Thursday revised its estimate of growth in the period to a 3.6 percent annual rate from 2.8 percent.

That was significantly better than the 3.1 percent pace economists had been expecting, and it marked the best quarter for growth since the first quarter of 2012, when output jumped by 3.7 percent. It also marked the first time since then that growth had exceeded 3 percent.

Much of the improvement came from additional stocking up on inventory by businesses as well as a slightly improved trade picture.

Inventory changes are notoriously volatile, so while the healthier signals would be welcomed by economists, inventory gains can essentially pull growth forward into the third quarter, causing fourth-quarter gains to slacken.

Indeed, Wall Street was already estimating that the fourth quarter of 2013 would be much weaker than the third quarter, with growth estimated to run at just below 2 percent, according to Bloomberg News.

The anemic pace of fourth-quarter growth also stems from the fallout of the government shutdown in October, as well as the continuing fiscal drag from spending cuts and tax hikes imposed by Congress earlier in 2013.

Still, if the better data on growth from the Commerce Department on Thursday is followed by more robust numbers Friday for the nation’s November job creation and unemployment, it increases the odds the Federal Reserve will soon ease back on stimulus efforts. The jobs data is scheduled to be released by the Labor Department at 8:30 a.m. Friday.

The labor market data for October was significantly better than expected, despite the government shutdown, and the consensus among economists polled by Bloomberg News is that the economy may have created about 180,000 new jobs in November, while the unemployment rate may have fallen to 7.1 percent from 7.3 percent in October.

Federal Reserve policy makers next meet on Dec. 17 and 18, with an announcement and news conference with the Fed’s chairman, Ben S. Bernanke, scheduled for the afternoon of Dec. 18.

Investors are eager for signs of stronger economic growth after years of only tepid gains, but they are also nervous about how quickly the Fed will step back from its aggressive stimulus efforts and let long-term interest rates begin to inch back up.

“You can never be unhappy with a 3.6 percent number for gross domestic product,” said Ian Shepherdson, chief economist at Pantheon Macreconomics. “But the details are more sobering than the headlines. Apart from the inventory numbers, the revisions are pretty trivial.”

For instance, he said, “Final sales, meaning the demand for goods and services excluding inventories, actually slowed. Either companies thought demand would accelerate and built inventories in anticipation of sales that didn’t happen, or they’re building anticipation of stronger demand in the fourth quarter.”

Mr. Shepherdson added: “It’s very likely we’ll see much slower inventory gains in the fourth quarter.” As a result, if demand doesn’t pick up in the final three months of the year, he explained, growth in the fourth quarter will likely be in the range of 1 percent to 2 percent, he Shepherdson estimated.

Today's Good GDP News Is Actually Bad News by Yglesias

I saw a lot of celebratory tweets just now when the Bureau of Economic Analysis revised its estimate of third quarter GDP upwards to 3.6 percent growth. And, indeed, that's a good number and an upside surprise. But the details are actually quite bad:

The acceleration in real GDP growth in the third quarter primarily reflected an acceleration in private inventory investment, a deceleration in imports, and an acceleration in state and local government spending that were partly offset by decelerations in exports, in PCE, and in nonresidential fixed investment. 

The key phrase here is "private inventory investment" which is when businesses build up their stock of goods. Inventory investment tends to swing. If firms build up inventories of unsold goods in one quarter, they typically spend down that inventory in the next quarter. The workhorses of exports (selling stuff to foreigners), PCE (selling stuff to Americans), and nonresidential fixed investment (so companies can make the stuff they sell to foreigners and to Americans) all decelerated.

Relatedly, Gross Domestic Income—an alternative procedure for counting up the same concept that GDP measures—rose only 1.4 percent in this report. The GDI approach is generally more accurate, further underscoring there are a lot of dark clouds to this silver lining.

Obama's inequality speech

Inequality is ‘the defining issue of our time’ by Greg Sargent

Abenomics

Yes more exports, but even more imports than exports as domestic demand increases.

Mark A. Sadowski on Abenomics

Observations on the Efficacy of Monetary and Fiscal Policy - Econbrowser

"Real net exports have increased since the last quarter of 2012. While the increase is modest, it is an increase; in contrast, in nominal terms, net exports continue to decline in both absolute terms, and as a share of nominal GDP."

Although Japanese nominal exports have surged by 15.2% between 2012Q4 and 2013Q3, nominal imports are up by even more, or by 16.5%:

http://research.stlouisfed.org/fred2/graph/?graph_id=149566&category_id=0

Devaluation improves a country’s trade balance only if the Marshall-Lerner condition on trade elasticities holds, and research shows that they’re not met in the majority of cases, either past or present:

http://www.emeraldinsight.com/journals.htm?articleid=17056473

That's not to say that currency devaluation isn't beneficial, of course it is, but the benefit flows primarily from increased domestic demand. Here is a study of the competitive devaluations of the Great Depression by Barry Eichengreen and Douglas Irwin:

http://www.dartmouth.edu/~dirwin/w15142.pdf

The Great Depression is a particularly important historical example because then, as now, most of the advanced world was up against the zero lower bound in policy interest rates.

An examination of Figure 4 on page 48 reveals that the only countries that experienced import growth from 1928 to 1935 (the UK, Japan, Sweden and Norway) were members of the sterling block that devalued early (1931). In most of these countries net exports actually declined over the period because imports rose more than exports.

The order of recovery from the Great Depression follows the order in which they abandoned the gold standard perfectly:

http://fabiusmaximus.files.wordpress.com/2009/03/gold.png

But this wasn't because of increased net exports.

The US devalued in 1933 which immediately led to a swift recovery from the Great Depression. Nominal exports doubled from 1933 to 1937. But nominal imports increased by 110.5%:

https://research.stlouisfed.org/fred2/graph/?graph_id=120991&category_id=0

As a result net exports went from a small surplus (about 0.2% of nominal GDP) to being roughly in balance.

France was part of the Gold bloc of countries that devalued late (1936). From 1936 to 1938 nominal exports increased by 95.4% and nominal imports increased by 80.9%:

https://research.stlouisfed.org/fred2/graph/?graph_id=120992&category_id=0

However, since imports were already substantially greater than exports, the nominal deficit actually increased by 55.4%.

Japan’s original ryōteki kin’yū kanwa (QE) was officially announced in March 2001 and concluded in March 2006. The following is a graph of the BOJ’s estimate of Japan’s real effective exchange rate which is trade weighted with respect to 16 different currencies and takes into account their relative inflation rates:

http://thefaintofheart.files.wordpress.com/2013/06/sadowski2b_1.png

The real effective exchange rate fell from 116.25 in February 2001 to 91.09 by March 2006, when the BOJ announced the completion of QE, a decline of 21.6%.

Exports rose from 10.2% of nominal GDP in 2001Q4 to 19.3% of GDP in 2008Q3. Imports rose from 9.4% of GDP in 2001Q4 to 19.5% of GDP in 2008Q3. From 2002Q1 to 2008Q1 real (adjusted by the GDP implicit price deflator) grew at an average annual rate of 11.0%. Real imports grew at an average annual rate of 12.1%.

So there was boom in both exports and imports. But imports grew faster than exports, and net exports actually moved from surplus (0.8% of GDP) to deficit
(-0.2% of GDP) between 2001Q4 and 2008Q3:

http://research.stlouisfed.org/fred2/graph/?graph_id=120989&category_id=0

It's very telling that today the only major currency area up against the zero lower bound in interest rates that hasn't done QE (the Euro Area) is also the only major currency zone where the trade balance has improved substantially since 2009, going from 0.6% of GDP in 2009Q1 to 3.5% of GDP in 2013Q2:

https://research.stlouisfed.org/fred2/graph/?graph_id=149559&category_id=0

But this has occurred in large part because nominal imports have been falling since 2012Q3 due to falling domestic demand. Nominal exports have barely changed since 2012Q3.