GREEN LANTERNISM: AN INFANTILE DISORDER by DeLong

Summers-fest

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

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

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

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

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

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

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

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

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

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

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

savings glut

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

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

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

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

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

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

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

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

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

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

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

Stiglitz, Minsky, and Obama by Krugman

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

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

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

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

GDP revisions: not a conspiracy, Jack by Doug Henwood

deregulation and currency policy

Economists Behaving Badly, Redux by Krugman

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

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

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

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

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

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

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

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

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

Profit Shares Even Higher With New GDP Measures by Dean Baker

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

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

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

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

the greatest show that ever was or will be

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

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

Shit just got real

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

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

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

Alan Blinder:

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

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

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

Abenomics

Japan and the consumption tax by Simon Wren-Lewis

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

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

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

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

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

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

Commenters, butteflys, etc. by Scott Sumner

Baker disagrees with DeLong on housing

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

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

Obama's unforced error

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

Clinton Fail

The Battle of Fed Succession, 1994 Edition by Dean Baker

The current efforts by Larry Summers' acolytes to have him replace Ben Bernanke as Fed Chair reminded me of a past battle. Back in the first term of the Clinton administration it was not assumed that Alan Greenspan had a lifetime position as Fed chair. Some folks thought that the Democratic president might want to take the opportunity to appoint a Democrat as Fed chair. The Vice-Chair at the time, Alan Blinder, was an obvious choice. Blinder had been a highly respected Princeton professor before joining President Clinton's Council of Economic Advisers and then moving over to the Fed at the start of 1994. 

Anyhow, Alan Greenspan wanted to head off this possibility. Towards this end, he managed to get a major piece in the NYT over a Blinder scandal. At a speech at the annual meeting of central bankers in Jackson Hole, Blinder suggested that central banks, instead of focusing exclusively on inflation, might actually worry a bit about unemployment (the horrors). Anyhow, the resulting outcry sent Blinder back to Princeton and left Greenspan in charge of the Fed for another decade. 

Ah, the good old days!

Quiet Rivalry Over the Next Fed Leader Comes Out of the Shadows by Binyamin Appelbaum

Juicy Juice: Growth and Inequality

Growth and Inequality: Thinking About the Middle-Out Hypothesis by Jared Bernstein

Interesting to think of this in terms of Krugman's objections.

From Obama's Galesburg speech:

In the period after World War II, a growing middle class was the engine of our prosperity. Whether you owned a company, swept its floors, or worked anywhere in between, this country offered you a basic bargain – a sense that your hard work would be rewarded with fair wages and benefits, the chance to buy a home, to save for retirement, and, above all, to hand down a better life for your kids. 

But over time, that engine began to stall. That bargain began to fray. Technology made some jobs obsolete. Global competition sent others overseas. It became harder for unions to fight for the middle class. Washington doled out bigger tax cuts to the rich and smaller minimum wage increases for the working poor. The link between higher productivity and people’s wages and salaries was severed – the income of the top 1% nearly quadrupled from 1979 to 2007, while the typical family’s barely budged. 

Towards the end of those three decades, a housing bubble, credit cards, and a churning financial sector kept the economy artificially juiced up. But by the time I took office in 2009, the bubble had burst, costing millions of Americans their jobs, their homes, and their savings. The decades-long erosion of middle-class security was laid bare for all to see and feel.

What happened? The bargain begin to fray? Impersonal forces like technology, globalization and the decline of unions? Washington policy skewed in favor of the rich. "The link between higher productivity and people’s wages and salaries was severed." After 3 decades the economy was growing as much as it was because of an "artificial juicing." 

Yellen versus Summers

In Tug of War Over New Fed Leader, Some Gender Undertones by Binyamin Appelbaum and Annie Lowrey

Obama's economic history

Andy Harless comments on DeLong's blogpost

You can call it neo-Austrian if you want, but I think the "bubble level of aggregate demand was unsustainable" view is quite consistent with standard Keynesian (actually neo-Wicksellian) macro theory. The Fed is and was targeting the inflation rate at 2%. Given the existence of a risk premium, it's quite possible (and, in my opinion, was the case in 2005) that the natural risk-free real interest rate is less than -2%. If that's the case, there is no full employment equilibrium that is consistent with the Fed's target. The only way to hit the inflation target while maintaining full employment is by creating a disequilibrium, which is by its nature unsustainable. In particular, in this case, the Fed did it by allowing people to be convinced that certain unsafe assets were in fact safe and thus, in effect, temporarily reducing the risk premium and allowing a positive nominal risk-free interest rate to support full employment.

Summers-fest

Larry Summers' Bad Math by Dean Baker

Furthermore, we still have the basic math problem that he left us from his years in the Clinton administration, how do we fill the gap in demand that resulted from his high dollar policy. While a subsequent fall in the dollar has reduced the trade deficit, it is still close to 4.0 percent of GDP ($640 billion). This can be filled by the government’s deficit spending, but Summers has repeatedly warned that this is only a short-term strategy. 

So how does Summer want to solve the math problem? Is he going to push for another bubble to juice the economy again or perhaps he has changed his mind and decided that a strong dollar really wasn’t such a good idea after all. 

Anyhow, there is no way around this math. You either want a lower dollar, you want to sustain high budget deficits, you want another bubble, or you want high unemployment. That is the math, what is Summers’ answer? We should know this before he gets appointed to the country’s most important economic post.

EZRA KLEIN AND EVAN SOLTAS: "IF THE PRESIDENT IS MAKING ANY CALLS HIMSELF, HE IS MAKING VERY FEW OF THEM" by DeLong