Wednesday, July 29, 2009

Piling on the CBO

The CBO has recently come under fire for its opinion that giving MedPac more authority would do nothing to contain Medicare costs.

I've long been annoyed at the CBO, however, as during the Stimulus Debate, the CBOs most current estimates, from mid-December, for unemployment were often cited, and are still cited, as a way to benchmark what economists thought would happen as the stimulus moves forward. As I posted back in February , however, those estimates, even then, were already a straight-up joke. Probably, from mid-January it was clear that those estimates were a joke. Here's the catch though: December's unemployment numbers weren't really that much of a surprise. Maybe .1% higher than one might have predicted mid-December... The CBO just did an obviously poor job with the forecast, and then made an even worse decision to let that forecast stand during the stimulus debate. With the Obama stimulus, the CBO told us, under the worst case scenario, unemployment would top out at 8.5% this December. As a matter of fact, it hit 8.5% in March!...

I wrote at the time that the CBOs rose-tinted forecasting would not help the Obama administration, since the stimulus would then be judged against an unrealistic baseline. And as a fact, the Republicans are fond of using the CBOs poor forecasting skills as a club to beat the President with...

And my criticism is in no way related to the fact that the CBO denied my internship application.

Friday, July 24, 2009

The Liberal WSJ

A few years back I read about some research published in the QJE, an elite academic economics journal published at Harvard, which claimed that the WSJ's news pages have a liberal bias (although this was pre-Rupert Murdock...)...

I've now subscribed to the WSJ for close to a year, and I'm still trying to find some evidence that the WSJ is not a print version of Fox News. Here is a case in point. The Headline for the story on the Dems "Millionaires Tax" is "The Small Business Surtax". And, if memory serves, although it is listed as an "opinion" piece here, it was NOT actually on the Op-Ed page in the print version.

A better headline would have been something like "Democrats try to strangle puppies and small-business owners."

Wednesday, July 22, 2009

Ben Bernanke is not the sharpest tool in the Fed

This is pathetic.

Dude needs to learn to speak in Greenspan-esque "Economese" when he doesn't know the answer to a question... Use some jargon, be long-winded, be boring, get a thick pair of glasses, be an economist!!!

For the record, I do not think the currency swaps in question -- half a trillion dollars to foreign central banks -- was what caused the US nominal dollar exchange rate to "appreciate". In the past year, dollar appreciations have been perfectly correlated with declines in the Dow, the seizing up of financial markets, and a diminishing in investor appetite for risk. The Fed's actions were almost certainly in response to this. What happened was, banks all over the world suddenly want to hold either T-bills or dollars, taking as little risk as possible, and not wanting to hold riskier assets such as the Pound or Euro. Everyone wants this at the same time, so to alleviate the demand, the Fed gives other countries half a trill in dollars in return for half a trill in their currencies... This, if anything, should slow the appreciation of the dollar, which is a good thing.

I cannot fathom why Bernanke could not just elucidate this, except to say that perhaps Bernanke is taking his marching orders from someone else and doesn't himself quite understand the rationale...

An Admission

This blog is not entirely, 100% anti-Larry Summers.

As we've said before, we can see a constructive role for him, actually. And now is the time -- we want to see Larry hit all of the Sunday talk shows this weekend, we want him on Fox News, we want him on Scarborough Country dominating Joe with his alpha-male style, we want him on CNN, all singing the praises of Universal Health Care.

When he's behind his desk at the White House, he does the president no good. We need his rich, conservative, white, male face on TV steam-rolling talking heads and shoving health care for the masses down their throats paid for on the backs of millionaires...

The Huffpo talks about some summers comments he made at a speech at the Peterson Institute from last week... But we need Summers on CNN and the networks, not C-Span. Nobody watches that but nerds, and nerds are already on board.

A second point: where is Bill Clinton? If I'd had been Obama, I'd have put the Big Dog in charge of health care reform, and of putting the Blue Dogs on leashes (or have them kennel-up)... Seriously, he should have tapped Clinton back in January to lead an exploratory panel on health care reform. In a tough fight like this, we need all the star power we can get. That means having the likes of Bill Clinton and Larry Summers pushing the case on TV, where battles like this are won or lost.

Another point -- I've thought for awhile that the President and Michelle should have used their star power right after the election to raise a shit-load of money for the health care fight down the road... Michelle alone could have bagged $1million/dinner plus, I suspect, right after the election. They could have amassed a war chest to fight the drug companies and health insurers, who are made out of money, rather than carrying out the fight as penniless as the uninsured they are fighting for.

Tuesday, July 21, 2009

Public Plan Petition...


Sign it. The lack of universal health care in America is inhuman and a national embarrassment. Seal it. Deliver it.

Universal Health Care Now

Here's an old post of mine on health care.

This is part of the post: "Here's a personal story about my cousin, who had two little girls: One day he was carrying boxes across an icy parking lot at work (Ohio in the winter...) Slipped. Fell. Had chronic back problems, but his employer wouldn't pay his medical bills. Tried to sue. anyway, he put on weight and was immobile for awhile. Which led to being unemployed for awhile... Which led to depression. Eventually, the depression got to him, and he decided enough was enough. He's no longer with us.

What would have become of my cousin if he'd have been insured? Admittedly, I don't know the answer to that. Whether he could have been completely cured or not (and perhaps not), it certainly would have made his life much easier. Now we've got the Economist blog telling us that insuring my cousin would have had "no net gain". To which I say Eff You! That's just insultingly let-them-eat-cake ignorant. "

Let's not forget we each have a duty to put pressure on our representative to enact fundamental health care change:

Make your call today!

Debate w/ the Ambrosini Critique...

Will, an opponent of Obama's fiscal stimulus, over at the Ambrosini Critique writes :
Given we haven’t seen deflation so far, fiscal stimulus is a hedge against it. Once stimulus finally comes on line, if the economy is in a deflationary spiral, it will help get it out. Of course, we all trust that if that contingency doesn’t come to pass, the spending will be quickly unwound. Right? Right!?
I then pointed out that, once we take into account what is going on at the state and local levels, there really isn't all that much stimulus left to "unwind". Perhaps 1 to 1.5% of GDP. (Or perhaps even closer to zero, if state and local budgets continue to worsen...) In addition, some of the spending earmarked for next year is in increased food stamps, medicare funding, and welfare payments in addition to infrastructure. And Intrade is now predicting that unemployment will be above 10% for the whole of next year, which implies that things like food stamps won't have been wasted. In any case, by the end of next year, most of the stimulus money will have been spent. And the stuff that gets spent after that is still likely to happen before the economy gets back to full employment, even if the recession is already over now.

He then writes, in the commments:
Also, I’d like to hear a theory for why “infrastructure spending a year or two from now” policy is better than monetary policy in a liquidity trap. If you say that it increases inflation expectations because of concerns the Fed will monetize debt, you have to give up on the “stimulus” aspect of such policy and all the hullabaloo about multipliers was wasted breath/typing. Otherwise, I’d really like to hear a story that suggest “infrastructure spending a year or two from now” increases aggregate demand today.
I've got a fuller response under his post , but the gist of my points are 1) changing the fiscal stimulus debate to one where debating whether the infrastructure getting spent two years from now (which is just a small part of the stimulus) is shifting the goalposts of the debate a bit. See the post below on how Pennsylvania is not paying its workers this month... Had the ARRA fiscal stimulus been larger, as I and many others argued for, then states would not be paying millions in IOUs right now, and would not have enacted billions in spending cuts and tax increases which have already taken effect. One thing which always bothered me about fiscal stimulus opponents (see David Brooks extreme confusion below, and he is one of the most intelligent conservatives and fiscal stimulus opponents around) is that they have largely been innocent of any knowledge about state and local tax hikes/spending cuts, such as the $3.1 billion in cuts in NYC for FY 2010, which actually began three weeks ago. So, while stimulus opponents always whine about the small stuff that's coming in two years, I have yet to here them argue for drastic spending cuts that are already in effect. This is for two reasons: The first is that "stimulus skeptics" such as David Brooks are fabulously ignorant of what is going on around them, particularly what is going on at the state and local level. The second is that arguing for spending cuts and tax hikes in the middle of a recession is much more difficult to argue, and sounds ridiculous on its face. So, they are just picking fights they can win.

OK, but what is different about now vs. normal times, when we can rely on the Fed? Well, all PhD students should know this stuff cold, but the basics are that, in general, running budget deficits are inflationary. Usually, inflation is bad, and the Fed will respond by raising interest rates to slow down the economy. Now, however, we actually want to create inflation! And unlike normal times, the Fed will not react by increasing interest rates, at least not anytime soon. Yes, the "stimulus" may replace some actions by the Fed of just creating assets out of thin air, and then buying stuff (Tbills, agency debt, mortgage-backed securities... called quantitative easing, or QE), but then again, all of that "other stuff" including QE has failed to prevent a dramatic rise in unemployment. Part of the difficulty is, of course, that the Fed doesn't have much practice using QE, which is probably why the Fed failed in taming this recession and has been unable to stop the bleeding in the labor market, going on 18 months now... And part of the reason why this is so tricky is that most of the QE the Fed does just goes right in to banks' excess reserves... Holding Tbills and holding cash are basically the same thing in the eyes' of banks. This implies that you'd have to do loads and loads of QE to have the same effect as a rate cut in normal times...

And, to the extent you believe that the Fed's powers have not diminished one iota with the lower bound, then you must believe that the Fed has been utterly negligent. Yet, few conservative economists (other than Scott Sumner) have really been berating the Fed for not doing enough, however... I am more critical.

OK, and I'm getting sick of the stimulus topic. Its importance pails in comparison to the Health Care debate!

"The Case Against Larry Summers"

Is made here .

It's a good article, although there's nothing there that readers of this blog don't already know.

I just have one quibble: Elizabeth MacDonald writes that "blogs on the Internet likely have this wrong" -- when talking about how to interpret Rep. Peter DeFazio's comment that "Larry Summers hates infrastructure." To argue against this, she cited as evidence Summer's testimony before the Congress in which he advocated infrastructure spending. This is complete nonsense, however, as Summers was trying to win support for the stimulus package which liberals such as this blog, and Peter DeFazio, thought were too small. It was likely Summers who wanted the inclusion of the corporate tax cuts, and who kept the overall stimulus to be smaller than I, and many others, including Rep. DeFazio, who were worried about fiscal problems at the state and local levels, wanted.

And, as a result of that small stimulus, Pennsylvania is now paying its state employees with IOUs instead of real money.

There is still a real disconnect between the stimulus money, and the fiscal position of the states. I was watching CNN the other day while waiting for an oil change, and they had a feature on about wasteful stimulus spending, featuring the upgrade of a "bridge to nowhere" that -- I shit you not -- "only 2500 cars use per day". (OK, there's a chance I have this wrong, and it was actually 2500 cars per week... but even then, that's enough to invest in bridge so that it will not collapse!) The next feature was on Pennsylvania's budget, which is so dire that even after tax hikes and spending cuts, the state cannot even afford to pay its employees, much less pave its roads.

Still, no one at CNN had any inkling of the disconnect between the two stories. The first is a part of the dialogue about how "harmful" (CNN's actual words) these utterly wasteful stimulus spending projects are, the second is a separate dialogue about how states are so broke they cannot even pay for basic services. The two "stories" of course, are mutually exclusive. The basic essence of both cannot be simultaneously true.

Remember way back in January when David Brooks warned us that "A governor with a few-hundred-million-dollar shortfall will suddenly have to administer an additional $4 billion or $5 billion. "

Oh how wrong he was...

Back in January, it turns out, Pennsylvania only had an $800 million dollar shortfall over the preceding year. That shortfall has now ballooned into an expected $3.2 billion, and this is counting all of the stimulus money it's getting... Check this out. Pennsylvania is now withholding July pay... California has now paid 150,000 IOUs, and is furloughing Fridays...

Then, there's also this:

"The impasse is growing more costly to California as its financial situation grows more precarious. Earlier this week, Moody's downgraded the state's credit rating to three notches above junk status, following a similar move by Fitch Rating, which put it two notches above.

The state treasurer warned Thursday that such downgrades limit California's ability to borrow money."

One wonders why, if the Fed can guarantee debt for the likes of Goldman Sachs, it cannot also do it for California...

Sunday, July 19, 2009

Stiglitz Article

As you might suspect from a blog pushing for the ouster of Larry Summers, we absolutely LOVE Joseph Stiglitz. (See Krugman post on Stiglitz article.)

The big problem with liberal economists, we think, is that there are simply not enough of us to go around... We hail Paul Krugman, hail Bradford Delong, hail... ???

And while we love Krugman, Stiglitz just operates on a slightly higher plane. He's the best economist of his generation.

I found one small example of this when I was doing research on the Asian Tigers. The rise of the Asian Tigers (+China) is probably THE big event in recent economic history. Yet, it really doesn't get all that much attention from economists. Most Econ PhD's these days are minted without ever being asked to think at all about the rise of East Asia in a class setting. Anyway, in the mid 1990s, there were a couple flashy papers by Alwyn Young claiming that the Asian Tigers had gotten rich merely via capital accumulation, and had had no TFP growth over a quarter of a century in which their economies were growing at nearly 10%/year. Krugman wrote up a piece based on Young's work in Foreign Affairs in 1995...

While it all sounded convincing at first -- East Asians did save a ton, and had impressive improvements in education and such -- when I delved deeply into Young's work (he's now at U of Chicago), I found that it to be complete garbage, and that much of his work was in fact fabricated. While I did find some critiques of it (South Koreans argued that TFP estimates for South Korea were too low; Taiwanese argued that TFP estimates for Taiwan and Hong Kong were too low, etc... TFP being a matter of national pride), the only complete dismissal of Young's approach I could find -- the only one who understood that the "study" was crap -- was Joseph Stiglitz.

Like I said -- the guy just operates on a higher plane...

Saturday, July 18, 2009

Summers Speech

Is here.

Krugman roughs him up here .

I think Krugman might even be a touch unfair to poor Larry... Larry was saying he had to balance the fact that a lot was needed with the fact that the stimulus needed to be rolled out the door quickly, and then rolled back up quickly.

Or perhaps he let him off too easy... for Summers also celebrates the fact that already $43 billion of the tax cuts and $64 billion of the aid to states is already out the door...

Yet, wait, why on Earth do aid to states and tax cuts take so long to get out the door? Those checks could have been cut immediately. (See the Bush stimulus!) California (and several other states) are paying with IOUs right now. Many states raised taxes and cut spending earlier in the year, changes which are going into effect already. These changes would not have happened with more aid to states -- aid which could have been designed to be dispersed from the federal government immediately.

And I thought the whole argument for having roughly 1/3rd of the stimulus be tax cuts was that "stimulus checks" could be sent out immediately? We'd clearly be a bit better off had, say, $243 billion in tax cuts been sent out in March/April, and $264 billion in aid to states been sent out in March/April, and then have the other $250 billion be spent on projects which take more time to ramp up...

So the stimulus, in addition to being too small, also carried significant design flaws... Some of the Aid to states was originally meant to be sent out in 2010! Nevermind some 40 states are in financial trouble now...

One wonders, of course, that if the tax cuts and aid to states is taking an inordinate amount of time to "get out the door" for no other reason than that's how Aunt Christie and Uncle Larry designed it, if perhaps the other third of long-term projects might not also have merely been poorly designed, rather than be taking so long due to the insurmountable difficulties of planning massive stimulus projects,etc... If the French and Chinese could do it, why cannot we Americans?

Summers also repeated the fraud that the stimulus is "5% of GDP".

OK, the stimulus was $787 billion. Trouble is it is over two years plus. Two years of GDP is roughly $30 trillion, or $37 trillion for two and a half years. So that makes it just %2.1 of GDP. But wait, over the same period, state and local governments have a shortfall of some $400 billion, which we knew full well about when the stimulus was planned. Thus, the "net" stimulus is more in the neighborhood of $400 billion, or closer to 1% of GDP. And we're still at least 5% of GDP below trend...

Thursday, July 16, 2009

Documenting the Decline and Fall of Harvard Econ

One reason why Summers wields so much influence, both within the White House and the media, is b/c of his resume -- tenured at Harvard at 28!

President Obama, is, of course, a Harvard man, and he can't be faulted for not knowing that the Harvard Econ Dept. is stocked w/ a bunch of crazies. 'Tenured at Harvard at 28' means a lot less when one considers that the likes of Jeff Sachs was tenured in his 20s and Andrei Shleifer at 30 (see tawdry Shleifer affair )... (And I do like some of Sachs papers/books, but they strike me as very good at best, not brilliant, and occasionally awful...)

I was doing some research for a paper on the effect of currency unions on trade, and saw UC Berkeley's Andy Rose's (2000) finding that currency unions triple trade. Then Glick and Rose (2002), find that currency unions double trade. Now, of course, these findings are patently ridiculous -- they reflect the fact that most currency union pairs are not random, but that countries form currency unions with countries they have close cultural connections to, such as New Zealand sticking to Sterling. The problem is what we economists call "endogeneity" and is an ubiquitous problem in the social sciences. A famous example (perhaps made up) is of the Roman Emperor who noticed that places that had more hospitals had more sick people, and so got rid of the hospitals (although that may well have been a good bet given the state of medicine in olden times...). And so Rose, and many others, confused correlation w/ causality, despite the ridiculousness of the result -- If Japan dollarized, Americans wouldn't suddenly buy twice as many Japanese cars...

To fix the endogeneity problem, Harvard's Robert Barro comes along, and uses some sophisticated amalgam of geographic variables to proxy for currency unions, and argues that currency unions increase trade 7-fold in one paper, and 14-fold in another!!!! He's saying, in other words, that if Japan dollarized, Americans would then buy 14X as many Japanese cars! The problem, of course, is that the necessary "exclusion restrictions" in economese is that the "gravity equation" used in the estimation be perfectly linear and correctly specified in its geographic controls -- which is entirely unrealistic. Geography seems to matter for both trade and development in all types of hard to imagine ways -- the linear gravity specification is in no way likely to be a perfect fit. And a 14-fold increase in trade is just pure madness...

Then we've got Harvard's Baldwin, who's 2006 recap of the currency union issue is ok (alternately good and clueless as all hell), although he eventually concludes that currency unions increase trade by 6-10%, even though he offers no evidence at all.

And more recently we've got Harvard's Jeff Frankel who calls Rose's original garbage: "one of the most influential empirical papers of the decade" -- which tells you the state of International Macro, who argues for a big effect once again while looking at the Euro. Trouble is including a simple time trend kills the effect of the Euro, and the "natural experiment" he tries at the end with African CFA countries on the Euro doesn't work b/c European countries abolished tariffs on Sub-Saharan African countries in 2001... And we know from other studies that mere pegs have no effect on trade...

So, given this crap, why should any young economist respect Harvard Econ?

Harvard Econ = Intellectual Midgetry...

Wednesday, July 15, 2009

Raison d'etre of this blog

Is here .

Basically, the site is merely to let other smart people know that Larry Summers is not actually one of us. He's an imposter w/ smart uncles.

The word "brilliant" is often used to describe him, but this is merely a meme that gets thoughtlessly repeated by those who can't tell a diamond from a fugazy, and has no foundation in his past policy positions or research. (OK, yes, his Dick Cheney-like capacity to steamroll people could be conceived as "brilliant", but this is not what your average journalist/meme copier means when s/he refers to Summers as "brilliant".)

The Hierarchy of Econ Blogs... google page rank

Krugman: 8
Mankiw: 8
DeLong: 7
Economist's View: 7
Economists for Firing Larry Summers: 6
Jeff Frankel: 6
The Ambrosini Critique: 5
George Borjas: 5

We're just happy we're ahead of Borjas...

We're All Monetarists Now?

OK, this is from the WSJ's opinion page... But still, I think they may actually be correct. A few days back, after the unemployment numbers were released, I sort of guessed the Fed would revert back toward more expansionary policy, and went "all-in" again in the stock market. Turned out to be a lucky bet. No bets on next week tho', given the perilous inflation-fighter we've got at the helm of the Fed...

Although correlation is not causality, whether it's wrong or not, I've come around to the view that this recession will end when Ben Bernanke says it will end. And it has gone on for 18 months now b/c Ben Bernanke has done too little. Perhaps now he's on the right path?

Saturday, July 11, 2009

Puffcake Summers Article

In the FT .

Notice there are no tough questions, and that this is really just a former student giving him a puffcake interview. No hard questions about why the stimulus was too small. Nothing about his misjudgment of enron, the asian financial crisis, welfare reform, or deregulation in the 90s. Nothing about the current precipitous decline in bank lending.


Thursday, July 9, 2009

Fed Chairman Summers?

See Brad DeLong .

I dunno what to say.

With options like these, how can Obama go wrong?

On one hand, he could stick with Ben Bernanke, inflation-fighter extraordinaire, who is dragging this recession out, kicking and screaming, much longer than necessary. Apparently he just hasn't got the testicular fortitude to do what his own research suggested Japan should have done in the 1990s and the Fed should have done in the 1930s...

Or we can have Larry Summers, who would also almost certainly be an inflation hawk, and who would likely use his position to decide the next few elections.

I enjoyed this quote: ' "maybe a professor of economics will never again be the best choice for the Fed chairman," said Darrell Issa (R., Calif.).' although i might be taking it out of context...

According to Intrade, there's a 69% chance Bernanke will get reappointed. Nevertheless, the article suggests that "Treasury Secretary Timothy Geithner is expected to play a key role in advising President Barack Obama on whether to reappoint Mr. Bernanke."

And Geithner is you-kno-who's boy! Summers will no doubt be pushing hard for the role...

Wednesday, July 8, 2009

Policy Proposal

OK, via e-mail I've discovered Senior Congressional Policy Advisers are among this blog's followers.

So, here's a serious proposal.

The issue is that the economy needs more stimulus, but a "Stimulus II" does not fit in to any easy political narrative for Dems or this President. The way to do it, then, would not be to do it as a "Stimulus II", but rather, as a "fiscal transfer program" for the states... Just an immediate transfer of $250-300 billion that the states can do what they want with, so that California can pay its IOUs immediately, and so Indianapolis does not have to public school spending for the inner city. The Center for Budget Priorities and Policies estimates that the ARRA did close about 1/3rd or more of many states budget shortfalls. How about closing the rest?

So, the marketing idea is to give it a name so boring newspapermen won't want to put it on the front page. The President can say, truthfully, that state and local budgets have gotten progressively worse in the past six months, and that the "balanced budget amendments" are the enemy of counter-cyclical policy, and are making the Feds job tougher, and that even Milton Friedman -- Milton Friedman! -- thought it dumb to balance budgets in the face of a downturn.

What it would like to report for the BBC on Eastern Europe from Vienna!

It's a rough job my ole' friend Ben Shore has...

Excess Reserves

One reason the dramatic increase in the money supply did nothing to the economy last fall is that it has all just gone into Excess Reserves -- bank reserves in excess of what the Fed requires:

Still, I don't see why this implies that the Fed should stop/slow down on QE. The only reason is the worry that inflation will be coming just around the corner. But that just doesn't look like a rational worry at this point...

So, why are we not in print-gobs-of-money-and-KO-the-national-debt mode? Worst case scenario is that we KO the national debt. Best case scenario is that the price level inflates, the dollar weakens, and the economy recovers. Which of these scenarios do we have to fear, exactly?

Here is the similar story in Japan (via the Cleveland Fed ; at least they can do something right). Keep in mind that 30 trillion yen is only $300 billion vs. a debt that is supposedly around $8 trillion. So Japan's QE was never actually that large, and peanuts compared to how much debt it actually could have monetized. What the Fed has already done is much larger.

And remember this Krugman post from a few months back -- what got Japan's economy going was its trade balance...

Anywho, as you can see above, the -- I dunno if funny is the right word -- thing is that Japan's QE didn't KO its debt forever. The Bank of Japan eventually dumped all that debt back on the market. And when it did, Japan returned more-or-less immediately right back into deflation. (Apparently, BoJ officials had not read my undergraduate thesis...)

And, we can see below that while QE in Japan might have weakened the yen a bit at first, the effect was slight and short-lived. What the Japanese should have done, then, was double-down, monetize another $300 bill of debt, only retire it forever rather than just temporarily...

QE to date...

From the FT (via a poster on Delong's Semi-Daily Journal):


The US Federal Reserve is roughly halfway through completing its planned purchases of mortgage and Treasury debt, which constitutes its quantitative easing programme, writes Michael Mackenzie in New York.

So far, the Fed has bought $197.7bn of government securities of a planned $300bn. Purchases of US agency mortgage backed-securities run at $621.6bn, against a target of $1,250bn by the end of the year. The central bank has purchased $96.8bn out of a planned $200bn in agency debt.

The Fed’s buying has not prevented either Treasury yields or mortgage rates from rising, complicating efforts to provide relief for homeowners and other long-term borrowers.

Following the path of higher long-term Treasury yields, the coupon for 30-year mortgages rose above 5 per cent last month, up from under 4 per cent in April.

The recent rise in rates, which accelerated in early June, sparked expectations among some bond traders that the Fed would increase its planned purchases of US Treasuries.

In March the Fed announced its target of buying $300bn in Treasuries and also raised its planned purchases of mortgages from $500bn to $1,250bn and doubled its planned agency buying to $200bn.

The scope of the Fed’s QE programme has aroused concerns it will nurture higher inflation and debase the currency. At its June policy meeting, the Fed stuck to its QE targets and said it would “continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets”.

With long-term rates having eased back and recent Treasury auctions attracting strong foreign buying, the central bank has some breathing room for now, say analysts. Should credit conditions deteriorate later this year or the economy’s recovery falter, the Fed may step up its purchases of Treasury debt.

(end quote)

This would seem to contradict Sumner..."raising its planned purchases of mortgages from $500bn to $1,250bn" is not nothing. He's a U of Chicago grad, so I should have known better.

Still, the question remains -- Why has the Fed only bought back $200 billion in treasuries? We're in the 18th month of recession. The economy still coughed up half a million jobs last month. If buying $200 billion in Treasuries has not ignited inflation or created jobs, why doesn't the Fed buy another $400 billion. (Or $2 trillion?) And why didn't they start doing this last November, rather than wait until this March? And buying only $200 billion over the past four months doesn't strike me as being all that fast. They should pull back the moment inflation hits 5% and employment starts jumping by half a million/month, not while we've had actual deflation in the total CPI over the past 12 months, when the 5 year TIPS spread suggests inflation at 1.3%/year over the next five years, and while the dollar is still stronger vs. most other currencies than it was last summer. Makes no sense to me whatsoever. It still smacks of a Fed that has been waaay too tepid, almost glacial...

And I just don't know what to make of comments like this: "The scope of the Fed’s QE programme has aroused concerns it will nurture higher inflation and debase the currency." But as you can see in the post below, if anything, the dollar is strong at the moment, and this clearly poses a risk as well. Plus, other countries who do not have the US's exorbitant privilege are worried about their falling currency values, with the only difference being that most every other currency has fallen against the dollar since the start of the crisis, lending them some justification.

What do others think?

What Could be Holding the Fed Back?

Well, it cannot be wage inflation which has held the fed back (hattip to pk):

Or exchange rates. Here's the US dollar per peso, which shows that the USD is still much stronger vs. the Peso than before the crisis started:

Here's the USD per Euro. The dollar is still stronger than it was last summer before the crash, so it can't be that.

Here's the USD vs. the Japanese yen. The dollar has strengthened vs. the yen since January after weakening in the heart of the crisis, so it can't be that either.

I wonder what has caused long-term inflation fears to reside suddenly: yields on long-term bonds (via Krugman), are actually dropping. Is the Fed hitting the spigots again?

The Monetary Base

OK, Scott Sumner is completely nuts. Here he is debating Ohanian: "Last fall, deflationary policies by the Fed caused the sub-prime mortgage crisis to spread to other types of debt. Unfortunately, almost all economists misdiagnosed the problem, assuming that it was the worsening financial crisis that was reducing demand, when in fact the reverse was increasingly true — falling demand reduced asset values and weakened bank balance sheets."

But the graph of the monetary base above does not show "deflationary policies" last fall. Fed policy may not have been enough, but it was in no sense "deflationary".

Nevertheless, since last fall, there has been a slight decline in the monetary base. Here Sumner may have a point. Still though, I'm a bit confused -- I remember being taught as an undergrad that the Fed doesn't really stress the MB numbers, b/c they seem to be less important in the era of modern banking than they used to be... In the past 2-3 recessions, the MB numbers looked completely unremarkable.

I just checked my Carl Walsh Monetary Theory and Policy book -- he writes that the correlation between M1 and M2 and other economic variables basically broke down after 1982... Sumner's focus on the MB appears misguided...

Fire Ben Bernanke?

Scott Sumner has got an interesting post, charging the Fed Chairmen w/ dereliction of duty: "the Fed did not engage in any QE at all in the first half of 2009, indeed the monetary base fell at near record rates." (QE=Quantitative Easing, which means the Fed creates assets out of thin air and uses it to retire gov't debt.)

Well, he may actually be correct that the reason the recession has been so deep, and that the unemployment rate has climbed so high is that the Fed, and particularly Bernanke, are simply stupid people who’ve spent their careers “doing algebra”… Proof Bernanke has never been the sharpest tool in the shed can be seen from his title and paper “is growth exogenous?” — and I’m not making this up! OF COURSE growth is not exogenous! And, as I've posted before, the papers on the Great Depression I've read of Bernanke's were really mediocre at best.

So, two things — for fiscal stimulus to have been worthless, then you must believe that the entire downturn should have been 100% avoidable, had the Fed started QE policies last fall rather than this spring. I'm not sure I actually believe this, but I don't actually know the record on QE -- so I figured I'd try to find out!

Here's an article from last November: "Total credit extended by the central bank has surged from an average of $885 billion in the week ending August 27 to $2.198 trillion in the week ending November 12."
The article also states: "Quantitative easing has begun."

And this quote is linked to in a post on Naked Capitalism , also last fall: "The US Federal Reserve’s policy is about avoiding a type-one error – underestimating the threat of a depression – at all costs. I was quite surprised last week – though perhaps should not have been – when I learnt that the Fed had quietly adopted a policy of “quantitative easing”."

But then, this March , the Fed once again announced it was starting QE.

But then we have Sumner: "I think you may be right about the Fed’s motives, but if so it shows that QE was always a sham. The Fed was never serious about boosting the base, which means QE was never tried. So while I admit you may be right, it still makes my post worthy of attention doesn’t it? After all, most of the pundits back in March treated the QE like it was an attempt to boost the MB. Nobody predicted the base would have its biggest decline (in the first half of 2009) since 1937."

So, I'm a bit perplexed -- after all, Bernanke is one who has argued that the Great Depression could have been prevented with more quantitative easing, and that Japan's "Lost Decade" could also have been prevented with more quantitative easing, and now that the US is still firmly ensconced in our 18th month now of recession, he's apparently favoring the Fed 1930s/Japan1990s approach to deflation-fighting...

But, perhaps Sumner just doesn't know what he's talking about. It's a bit crazy for him to say that the fiscal stimulus was actually "counterproductive" -- you'd have to believe, first, that Bernanke has been negligent, and second, you must believe that raising taxes and cutting inner city education spending are good to do in a recession, and that the road from San Fran to Tahoe doesn’t need to be repaved.

On the 2nd point, I’m hardly a dispassionate observer — I got a flat on that road which sucks shit (representative of California’s infrastructure and shitty schools), and I’m equally certain that cutting school funding for inner city schools is a f*cking terrible way to balance a budget. New York city increased Met fares for disabled people, and florida increased taxes on retirement homes. South Carolina cut food stamps. Sumner’s argument that a little extra QE would cancel out all these cuts sounds like utter nonsense to my ears.

And the thing to realize about the first point is that there are two ways to fight a recession. One is fiscal policy, one is monetary policy. One way to fight it would be to use only monetary policy. Another would be to use only fiscal policy and hold monetary policy constant. With 9.5% unemployment and rising, with GDP dipping at a 6% annual rate in Q1 (and contracting at 10%+ in many other countries), with a recession which has lasted 18 months and counting, the argument that “Ha! Fiscal policy was not necessary b/c Monetary policy alone would have prevented the recession!” is a bit strange… And, after all, there are costs associated with both as Krugman explained back in March.

In conclusion, just b/c the Fed is staffed w/ psuedoscientists rather than rocket scientists doesn’t mean fiscal policy is worthless… And I still need to read more about what the Fed has and has not done...

Sunday, July 5, 2009

More on Larry Summers' Hero, Milton Friedman

Matt Yglesias who, via Felix Salmon, quotes to a study about the negative externalities of vehicular traffic, which found "that driving a car into Manhattan on a weekday causes about $160 of negative externalities to everybody else."

This, of course, made me think of Larry Summers' hero, Milton Friedman. For him, one of the key examples of egregious abuse of governments anywhere was found in how much it cost to get a taxi license in New York City. The only reason for this, Friedman wrote, was sheer corruption. The licenses were worth more if there was a limited number.

If we priced based on negative externalities alone, however, the price would come to $50,000+/year...

Here's the NYC Taxi and limousine commission. Although they do require what are no doubt some lame classes, a drug test, and some various registration fees, it does not look to be terribly expensive:

Update: Commenter Justin Dangel has more perseverance than I: medallions for Taxis still cost around $575,000. This means that roughly they are priced correctly, though still a bit on the cheap side (assuming 6% discount in perpetuity they should be more like $800,000...)... My laziness aside, the point stands -- unless we are at the point where there are so few taxis in NYC it is hard to get one. That hasn't been my experience, but I haven't been to NYC recently. And although I travel extensively, I can't remember the last time I had trouble flagging down a cab in a large city...

Update II: I found my Friedman pamphlet! So let's quote from the master himself: "One common explanation of why government is the problem... is the influence of special interests. A dramatic example ... when I was talking to a taxicab driver in New York City... the number of taxicabs is limited by government fiat... the medallion signifying permission to operate a taxicab ... costs somewhere between $100,000 and $125,000." (This was back in the day of course...)

Friedman then confidently states: "If the limitation on the number of taxis were removed, the benefits would greatly exceed the losses." Friedman apparently thought not at all about the cost of increased traffic. To him the only costs are those absorbed by those who already own medallions. But the widely dispersed costs to other drivers are about $50,000/year per taxi. And this is just a point estimate based on what traffic is like now. If there were no limit on taxis in NYC, traffic would be way, way worse than it already is, and the marginal costs could be higher (or lower, for that matter, but even in this case the total costs would be much higher). Everyone would be worse off. Friedman is correct about something though: "The phenomenon of concentrated benefits and dispersed costs is a valid explanation for many governmental problems." In this case though, there should be taxes and limitations on all cars in NYC, and, if anything, cabs should be taxed more cheaply than normal cars, since taxis are a substitute for people driving. The phenomenon of dispersed costs not born by drivers is the argument for government intervention.

Milton Friedman was profoundly wrong. And in a way which strikes at the heart of his theology.

Saturday, July 4, 2009

Why Economists Should Study Anthropology...

OK, so one big gripe I have with the way that economics is taught is that emphasis has always been on just doing a bunch of math, writing proofs, etc., with no realization that most economists' views on any economic issue are in fact decided, not by any model, but by said economists political views, sex, race, and social position. Economists merely use models to argue for their preconceived political views, often which were developed in high school or before.

Hence, when evaluating someone's argument (or one's own), it is always appropriate to evaluate their (your) biases.

So, I just reread chapter 7 of Friedman & Schwartz's Monetary History of the US in which they argue that the Fed alone could have prevented the Great Depression. Now, that's an almost impossible claim to prove or disprove (Schwartz & Bordo claim to prove it in another paper), but what worried me is that much of the Chapter almost sounds like a white-washing of Hoover and the role of conservative economic ideology during the crisis, both of which, quite clearly, deserve central blame. Why am I worried about this? Because, if I'm not reading Friedman & Schwartz incorrectly, they spend more time blaming FDR for the Great Depression in Ch. 7 than they spend blaming Hoover!!! Now, they never say such a thing, and if they did, it would be crazy, but nevertheless it's a case of having their biases on full display. Blaming FDR for the third banking crisis without blaming Hoover (who, btw, was still President, and who could much more easily have stopped it) is just plain nuts. Crazy. Delusional.

It should be added, though, to Friedman's credit, that he is not nearly as crazy as many conservatives -- both economists and politicians -- who want to balance the budget today while in a recession. He points out that it's just hard to understand why anyone wanted to balance the budget during the Great Depression except that that was just the funny mentality of the period.

And I'm not sure yet which way I come down on the issue -- I don't know nearly enough about it and I feel it's just one of those really difficult questions which in the end is not that important. The Fed wasn't nearly as independent at the time and things CERTAINLY would have gone much better had Hoover gone off of gold sooner, had Hoover stepped in to stop the banking crisis like FDR did immediately after taking office, and had Hoover not convinced himself he had to balance the budget at all costs. And the Fed was extremely aggressive in cutting the discount rate at the start of the crisis -- it just wasn't enough...

Who Wants to Answer a Prelim Question?

Here it is: "In what sense did the Federal Reserve ‘fail’ in the Great Depression? What would appropriate policy have been a) from the point of view of the social planner? b) given the pre-existing monetary and political constraints?"

Have at it!

Let's see, we've got Friedman & Shwartz, Temin, Romer, Eichengreen, Ohanian, Bernanke, Bordo...