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.