Carthaginian Peace

Athenae Delenda Est by Krugman

OK, this is amazing, and not in a good way. Greek talks with finance ministers have broken up over this draft statement, which the Greeks have described as “absurd.” It’s certainly remarkable. On my reading, here’s the key sentence:

The Greek authorities committed to ensure appropriate primary fiscal surpluses and financing in order to guarantee debt sustainability in line with the targets agreed in the November 2012 Eurogroup statement. Moreover, any new measures should be funded, and not endanger financial stability.

Translation (if you look back at that Eurogroup statement): no give whatsoever on the primary surplus of 4.5 percent of GDP. 

There was absolutely no way Tsipras and company could sign on to such a statement, which makes you wonder what the Eurogroup ministers think they’re doing. 

I guess it’s possible that they’re just fools — that they don’t understand that Greece 2015 is not Ireland 2010, and that this kind of bullying won’t work. 

Alternatively, and I guess more likely, they’ve decided to push Greece over the edge. Rather than give any ground, they prefer to see Greece forced into default and probably out of the euro, with the presumed economic wreckage as an object lesson to anyone else thinking of asking for relief. That is, they’re setting out to impose the economic equivalent of the “Carthaginian peace” France sought to impose on Germany after World War I. 

Either way, the lack of wisdom is astonishing and appalling.

It was pointed out that Varoufakis alluded to the Melian dialogue.

Krugman on Keynes

Keynes Is Slowly Winning by Krugman

On Not Being Stupid by Krugman

Rooseveltian Resolve

Four Questions about Fiscal Policy by JW Mason

The Nearly Forgotten Dearly Beloved 1920-21 Depression Yet Again; Or, Never Reason from a Quantity Change by David Glasner

‘Battle of the beards’: Paul Krugman vs. Ben Bernanke by Robert J. Samuelson (May 6, 2012)

Ben Bernanke (1999): "Rooseveltian Resolve" by DeLong  (March 02, 2013)

Japanese Monetary Policy: A Case of Self-Induced Paralysis? by Ben Bernanke (December 1999)

Earth to Ben Bernanke: Chairman Bernanke Should Listen to Professor Bernanke by Krugman (April 24, 2012)

Baker and Krugman on QE

Krugman on Quantitative Easing and Inequality by Dean Baker

Housing and Fed Fail

Baker would agree investment is as expected - pace Yglesias, but would disagree about housing.

Over at Equitable Growth: Is There Really a Profits-Investment Disconnect?: (Late) Friday Focus for October 24, 2014 by DeLong

As a result of the housing bubble, the mortgage frauds, the attempts at regulatory arbitrage on their balance sheets by the money-center universal banks, the financial crisis, et sequelae, U.S. real GDP today is now 12% below what we back in 2007 expected it to be now. Since the post financial-crisis trough U.S. real economic growth has proceeded at 2.24%/year, compared to the 3.00%/year growth rate we saw between 1990 and 2007.

So far there are no signs anywhere that the gap between today and the pre-2007 trend in levels will be made up. So far there are no signs anywhere that the gap between today and the pre-2007 trend in growth rates will be made up. 

That means that, come 2024 a decade hence, we can now expect a U.S. economy to be 19.5% smaller than the economy we confidently projected as of 2007 we would have. 

And, with a capital-output ratio of roughly 3, that means that between 2007 and 2024 cumulative net investment will be lower than projected back in 2007 by 58.5%-point years of GDP--and cumulative gross investment considerably lower.

Krugman on Wolf

Why Weren’t Alarm Bells Ringing? by Paul Krugman

Bill Gross

Over at Equitable Growth: Why Was Bill Gross so Certain Interest Rates Were on the Rise Back in February 2011?: Tuesday Focus for September 30, 2014 by DeLong

The Pimco Perplex by Krugman

It’s fairly clear that the events of 2011 are a large part of the story of Bill Gross’s abrupt departure from Pimco; as Neil Irwin says,

A disastrous bet he made against United States Treasury bonds in 2011 led to three years of underperformance and billions in withdrawals.
And Joshua Brown has some choice quotes:

Gross compounded the move by being extremely vocal about his rationale – he went so far as to call Treasury bonds a “robbery” of investors given their ultra-low interest rates and the potential for inflation. He talked about the need for investors to “exorcise” US bonds from their portfolios, as though the asset class itself was demonic. He called investors in Treasury bonds “frogs being cooked alive in a pot.” 

But why was Gross betting so heavily against Treasuries? Brad DeLong tries to rationalize Gross’s behavior in terms of a coherent story about an impending U.S. recovery, which would lift us out of the liquidity trap. But Gross wasn’t saying anything like that. Instead, he was claiming that the Fed’s asset purchases — QE2 — were holding rates down, and warned that the impending spike in rates when QE2 ended would derail recovery. 

So why did he believe all that? It all comes down, I’d argue, to liquidity trap denial. 

Since 2008 the basic logic of the economic situation has been that the private sector is trying to run a huge surplus, and the public sector isn’t willing to run a corresponding deficit. The result is an economy awash in desired savings with nowhere to go. This in turn means that budget deficits aren’t competing with private borrowing, and therefore need not drive up interest rates. This isn’t hindsight; it’s what I and others have been saying since the very beginning. 

But a lot of people — politicians, of course, but also a lot of people in finance — have just refused to accept this account. They have clung to the view that budget deficits must lead to higher interest rates. You might think the failure of higher rates to materialize, year after year, would cause them to reassess — indeed, would have caused them to reassess years ago. 

Instead, however, many of them made excuses. Above all, the big excuse was that rates would have gone higher if only the Fed weren’t buying up the stuff. So QE2 acquired a much bigger role in their thinking than it deserved, leading to confident predictions of soaring rates as soon as it ended. And Gross put his money — and more importantly, his investors’ money — where his mouth was. 

And he was wrong. QE2 ended, and nothing happened to rates. 

You can see why I found Gillian Tett’s apologia for Gross — that he was blindsided by central bank intervention — frustrating. For one thing, that’s accepting a model that has failed with flying colors; but beyond that, Gross’s really bad call was almost exactly the opposite, his claim that rates would soar when the Fed’s intervention ended. 

As I’ve said, Gross of all people shouldn’t have fallen into this trap, since his own chief economist understood liquidity trap logic better than almost anyone. But finance people seem weirdly determined to believe in a macro canon whose hold on their perceptions appears to be completely unbreakable, no matter how much money it causes them to lose.

macro, Keynes and monetarism

Their Own Imaginary Keynes (Wonkish) by Krugman

IS-LM as “Obfuscation”? No: Thursday Focus for September 11, 2014 by DeLong

Nick Rowe on Money and Coordination Failures by David Glasner

What Is Special About Recessions in a “Monetary Economy”: Trollng Nick Rowe: Wednesday Focus for September 10, 2014 by DeLong

euthanasia of the rentier

The Euthanasia of the Rentier by Krugman

A commenter quotes John Maynard Keynes: 

The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.

It is, of course, a perfect quote for our times, too. It comes from the last chapter of the General Theory — a chapter that definitely bears rereading in the light of current debates. 

For what Keynes describes in this chapter is, pretty much, a condition of secular stagnation — of persistently low returns on investment, in which there is a chronic oversupply of saving. He believed, in 1936, that this would be the state of affairs in the decades ahead, and was of course wrong in that belief. But he wasn’t wrong about the possibility of such a state of affairs, and since Larry Summers came out as a secular stagnationist, the view that we may well be there now has gone mainstream. 

What struck me, looking at what Keynes wrote, were his remarks on interest rates and the return to capital: low rates of interest, he suggested,
Actually, for now at least profits remain high — but bond yields are very low.

The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.

would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. 

What Keynes didn’t say, but now seems obvious, is that the rentiers are unlikely to accept their euthanasia gracefully. And therein, I’d argue, lies the ultimate explanation of the persistent clamor for monetary tightening despite weak economies and low inflation. I’ve described on a number of occasions how tight-money advocates are constantly shifting their arguments — it’s about inflation; no, it’s about sound market functioning; no, it’s about financial stability — but always with the same bottom line: rates must rise now now now.

Well, what I think we’re hearing is the sound of rentiers and those who, explicitly or implicitly, work for them, demanding their natural right to earn good returns even if the resource they control isn’t actually scarce anymore. They are not willing to go gently into their euthanasia.

 From Chapter 24:

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest to-day rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce. 

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.

Austerians

While thinking about public choice theory, Daniel Kuehn links to Krugman and Noah Smith about the push for austerity. Krugman links to Naomi Klein and Mike Konczal.

SecStags

Secular Stagnation: The Book by Krugman

Secular Stagnation: Missing the Forest for the Trees by David Beckworth

There is a new VoxEU ebook on secular stagnation. The book is a collection of essays by many prominent economists, most of whom are proponents of secular stagnation. As readers know, I am not convinced that this problem lingers over the U.S. economy and have explained why at the Washington Post and on this blog. This latest book does nothing to ease my skepticism. Many of the authors continue to mismeasure the real interest rate and ignore what I see as important technology and demographic developments that undermine the case for secular stagnation. Let's review these key issues. 

First, real interest rates adjusted for the risk premium have not been in a secular decline. Everyone from Larry Summers to Paul Krugman to Olivier Blanchard ignore this point in the book. They all claim that real interest rates have been trending down for decades. The editors of the book, Coen Teulings and Richard Baldwin, even claim that this development is the 'prima facie' evidence for secular stagnation. What they are doing wrong is only subtracting expected inflation from the observed nominal interest rate. They also need to subtract the risk premium to get the natural interest rate, the interest rate at the heart of the story. For it is the natural interest rate that is affected by expected growth of technology and the labor force.

Beckworth is optimistic saying we just had a bad business cycle. Edward Lambert says we'll have a startling bad recession in the next three years with signs showing the next six months because of the "effective demand" limit.

I don't think so.

Inflation Hawks Have Been Wrong for Years. Should We Listen to Them Now? by Danny Vinik

Richard Fisher, the president of the Dallas Federal Reserve, has an op-ed in Monday’s Wall Street Journal warning that the Fed’s current policy risks sparking high inflation. “Given the rapidly improving employment picture, developments on the inflationary front and my own background as a banker and investment and hedge fund manager,” Fisher writes, “I am increasingly at odds with some of my respected colleagues at the policy table of the Federal Reserve as well as with the thinking of many notable economists.” 

This isn't the first time Fisher has been at odds with his colleagues. When the Fed undertook “Operation Twist” in 2011, Fisher was one of three members of the Federal Open Market Committee—the committee that decides Fed policy—to dissent. He's also been the committee’s staunchest inflation hawk, and Monday’s op-ed was just the latest of many warnings Fisher has issued over the past few years about supposed forthcoming inflation. Here are five examples since 2011: 

... 

Richard Fisher:

"I'd rather see the Texification of the United States than the Californification. California's a beautiful place. I was born there, and I go out there often."

Krugman:

How it all turns out is anyone’s guess — maybe we eventually see a California scenario on a national basis, with the growing diversity of the electorate and the evident madness of the right delivering an overwhelming Democratic majority; maybe we see some exogenous event tip the balance back to the GOP despite what looks like a trend the other way. But what I don’t think we’ll see, even if there’s a Clinton in the White House, is another Clinton era in which liberalism is afraid to take a stand.

unemployment and inflation

The Tradeoff between Inflation and Unemployment: What We Don’t Know Can Hurt Us by Jared Bernstein

Inflation, Unemployment, Ignorance (Slightly Wonkish) by Krugman

anchored perceived inflation

I asked in comments for DeLong to add Waldmann's post on "anchored perceived inflation" and he did.

Menzie Chinn has a related post.

And here's DeLong's post on Chris House and Krugman from a week ago.

Phillips curves with anchored expectations by Robert Waldmann (from July 1st)

Keynesians

Aggregate Demand, Aggregate Supply, and What We Know (Wonkish) by Krugman

Still, we try. New Keynesians do stuff like one-period-ahead price setting or Calvo pricing, in which prices are revised randomly. Practicing Keynesians have tended to rely on “accelerationist” Phillips curves in which unemployment determined the rate of change rather than the level of inflation. 

So what has happened since 2008 is that both of these approaches have been found wanting: inflation has dropped, but stayed positive despite high unemployment. What the data actually look like is an old-fashioned non-expectations Phillips curve. And there are a couple of popular stories about why: downward wage rigidity even in the long run, anchored expectations. 

The point, however, is that the price-setting side of the models has never been an integral part of Keynesian doctrine, and the surprising resilience of inflation hasn’t undermined the core insights. 

And it remains true that Keynesians have been hugely right on the effects of monetary and fiscal policy, while equilibrium macro types have been wrong about everything.

And Robert Waldmann's Fox News inflation-distortion bubble which isn't exactly anchored expectations. It boosts expected inflation rates.

market monetarism

Tony Yates on market monetarism by Scott Sumner

Understanding the Crank Epidemic by Krugman

James Pethokoukis and Ramesh Ponnuru are frustrated. They’ve been trying to convert Republicans to market monetarism, but the right’s favorite intellectuals keep turning to cranks peddling conspiracy theories about inflation. Three years ago it was Niall Ferguson, citing a bogus source. Ferguson was widely ridiculed, by moderate conservatives as well as liberals — but here comes Amity Shlaes, making the same argument and citing the same source. The “reform conservatives” have made no headway at all. 

Why this lack of progress? 

The answer is that inflation paranoia isn’t a simple misunderstanding that can be corrected by pointing to evidence. It’s deeply embedded in the modern conservative psyche. Government action must, by definition, have disastrous results; and whatever market monetarists may try to say, their political comrades will continue to lump monetary policy in with fiscal stimulus and Obamacare. And fiat money can’t work — Francisco D’Anconia said so, and it must be true. So it’s always the 70s, if not Weimar, and if the numbers say otherwise, they must be cooked. Evidence has a well-known liberal bias. 

Even the rare conservative willing to admit that we don’t yet have high inflation won’t admit that this suggests something wrong with models that predicted a huge inflation surge. No, it’s just a miracle. 

So market monetarism isn’t going anywhere, politically. It was conspicuously absent in the Eric Cantor-sponsored book of supposed new ideas — and Cantor himself was knocked out of Congress by a faith-based Randite (which doesn’t make sense, but sense also has a well-known liberal bias.) 

Sorry, guys, but you have no home.

 And he doesn't mention Taylor's push to end the Fed's independence.

euthanasia of the rentier

TRYING AND FAILING TO UNDERSTAND THE 84TH BIS ANNUAL REPORT: MONETARIST, DELEVERAGING, FISCALIST, AND ??? UNDERSTANDINGS OF OUR CURRENT DILEMMAS: THE HONEST BROKER FOR THE WEEK OF JULY 5, 2014 by DeLong

The Euthanasia of the Rentier by Krugman

A commenter quotes John Maynard Keynes:

The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.

It is, of course, a perfect quote for our times, too. It comes from thelast chapter of the General Theory — a chapter that definitely bears rereading in the light of current debates.
For what Keynes describes in this chapter is, pretty much, a condition of secular stagnation — of persistently low returns on investment, in which there is a chronic oversupply of saving. He believed, in 1936, that this would be the state of affairs in the decades ahead, and was of course wrong in that belief. But he wasn’t wrong about the possibility of such a state of affairs, and since Larry Summers came out as a secular stagnationist, the view that we may well be there now has gone mainstream. 

What struck me, looking at what Keynes wrote, were his remarks on interest rates and the return to capital: low rates of interest, he suggested,

would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. 

Actually, for now at least profits remain high — but bond yields are very low. 

What Keynes didn’t say, but now seems obvious, is that the rentiers are unlikely to accept their euthanasia gracefully. And therein, I’d argue, lies the ultimate explanation of the persistent clamor for monetary tightening despite weak economies and low inflation. I’ve described on a number of occasions how tight-money advocates are constantly shifting their arguments — it’s about inflation; no, it’s about sound market functioning; no, it’s about financial stability — but always with the same bottom line: rates must rise now now now. 

Well, what I think we’re hearing is the sound of rentiers and those who, explicitly or implicitly, work for them, demanding their natural right to earn good returns even if the resource they control isn’t actually scarce anymore. They are not willing to go gently into their euthanasia.

stagflation and the 1970s and international macro

The Lucas critique

Permanently raising inflation in hopes that this would permanently lower unemployment would eventually cause firms' inflation forecasts to rise, altering their employment decisions. In other words, just because high inflation was associated with low unemployment under early 20th century monetary policy does not mean that high inflation should be expected to lead to low unemployment under every alternative monetary policy regime.

With hysteresis, permanently lower inflation translates into permanently higher unemployment.

Rereading Lucas and Sargent 1979 by Simon Wren-Lewis

A commenter points to Krugman's take:

Rudi Dornbusch and the Salvation of International Macroeconomics (Wonkish)

Fallacies of Immaculate Causation

Currencies, Prices, and Mike Mussa (A Bit Wonkish)

Hermetic Economic Cults (Wonkish)

Exchange Rates and Wages

New Frontiers in Economic Barbarism

History Roolz

uncertainty

Insufficient Demand vs?? Uncertainty by Nick Rowe

Krugman concurs.

Sweden and monetary policy

Why leaning against the wind is the wrong monetary policy for Sweden by Lars E.O. Svensson

Swedish Sadomonetarist Setback by Krugman

OK, this is fairly amazing. I’ve written often about sadomonetarism among central bankers — the evident urge to find some reason, any reason, to raise interest rates despite high unemployment and low inflation. The most influential hive of this kind of thinking is the Bank for International Settlements, which for some reason commands great respect even though it offers an ever-changing rationale — inflation! Any day now! Or maybe not! Financial stability! — for its never-changing advocacy of tight money. But the place where policy makers most dramatically gave in to this urge is Sweden, where the majority at the Riksbank decided to indulge its rate-hike vice while freezing out one of the world’s leading experts on deflation risks, my friend and former colleague Lars Svensson. 

Well, guess what: Lars has been proved so dramatically right by events — raising rates didn’t curb rising debt, but it did push Sweden into deflation — that the Riksbank has done an abrupt U-turn, slashing rates (and overruling the governor and first deputy governor). 

Actually, the drama of this U-turn may be a very good thing, since it might convince investors that this is a real regime change.