Saturday, July 31, 2010

Review of the Acemoglu text...

A commenter asks for a discussion of the Acemoglu text. I reviewed it here. Although I was harsh on him, I think it's deserved. And I certainly stand by the conclusion that it's bad enough in enough ways to warrant taking MIT Economics much less seriously.


Why Isn't the Fed Doing More?

This article yesterday has gotten a lot of play on econ blogs, as it reveals Bullard's shift (15 months late, but hey, it's progress). Here's the money quote:
“I think the fear of deflation in and of itself is probably overblown,” Charles I. Plosser, president of the Philadelphia Fed, said last week. He said that inflation expectations were “well anchored” and noted that $1 trillion in bank reserves was sitting at the Fed. “It’s hard to imagine with that much money sitting around, you would have a prolonged period of deflation,” he said. And Richard W. Fisher, president of the Dallas Fed, said this week, “Reasonable people can argue that there’s a risk of deflation, but we haven’t seen it in the numbers yet.”
I've always been wondering what the argument is for not doing more. In the back of my mind, of course, has always been some creeping doubt that maybe these people have some argument for not doing more that I hadn't considered. This quote shows that this isn't the case. “It’s hard to imagine with that much money sitting around, you would have a prolonged period of deflation” may be the single dumbest quote by any economist since Mellon's "liquidationist" quote during the Great Depression. It's like a gambling addict at the roulette table thinking "well, it's landed on black twice in a row, hard to imagine we'd have black again" -- is roughly the equivalent logic. When you've got high unemployment and a depressed economy, banks sit on cash. That's what's been happening the past 19 months already, that's what's happened the last 17 years in Japan, and that's what happened during the Great Depression.

Fisher's quote is just as stupid for two reasons. First, whether or not we slip into actual deflation is not the basis for doing more. Having inflation and expected inflation less than 2% should be necessary condition for doing more, which is satisfied. Secondly, the CPI for June was -.1%. The Producer Price Index is at -.9% the past three monthss... On the year so far the CPI has been -.1%. That's deflation. Of course the core cpi, which is more important, is still positive, but it's not as if there is "no sign" of deflation...

The Flat Tax...

A friend emails to ask about the flat tax, as a friend told her it would be good since it would close corporate loopholes. Here's how I responded.

I'm deeply skeptical of your economist-friend's claims. I think s/he is probably correct that closing loopholes which allow the rich and corporations to avoid paying taxes need to be closed (although, again, at this point wait until the recession is clearly over), but this seems to me to be a separate issue than whether you've got a flat tax or a progressive tax. For example, Exxon Mobil had profits in 2009 of $45.2 billion (and this comes after they paid their executives lavishly, their CEO got $22 million -- in 2005, their CEO took home $400 million), and their federal tax liability was 0 (since they've got these subsidiaries located in places such as the Bahamas and the Grand Caymans). Having corporations like Exxon Mobil pay no taxes effectively subsidizes oil, even though oil has all of these negative externalities, like pollution, carbon emissions, global warming, oil spills and paying money to countries like Iran and Saudi Arabia.
This stuff, of course, is outrageous and I think it plays well on TV. Also, there are easier ways of "simplifying" the tax code. You could eliminate all the deductions and credits and just make a simple progressive tax scale. And the progressive tax scale clearly needs to be designed to do something about $400 million salaries. Such as, all income above $30 million should be taxed at 65% instead of 35%. The basic problem is that Exxon Mobil has many shareholders, and those shareholders own many other corporations, and for no individual investor would it be rational to spend all their time policing executive pay, when $400 million divided by $45 billion is such a small number... As a result, there is vast looting of corporations which have really strong market power.

If we have a flat tax of 30%, we'll see more $400 million salaries, and this will hit graduate students like myself very, very hard. I'd react by buying fewer books/newspapers and eating cheaper food. Millionaires will react by buying more houses, more yachts, more expensive wine, etc... Poor people spend a higher proportion of their income on childcare, food, health care and education than do the ultra rich. So, I'm going to have to say that a flat tax, in making America even more unequal, would slow growth.

Lastly, to make this confusing, I should add that there are ways of doing a flat tax that would make it progressive. Like, everyone gets $10,000 automatically and then pays 33% on everything they make. So, if you make nothing, you get $10,000. If you make $30,000, you pay nothing, $60,000, you pay $10,000. Only issue is that, again, it's tough to do anything about the 400 million dollar salaries with a flat tax... And I think giving people money automatically rather than make the unemployed show proof that they are job-searching to get benefits is a bad idea... Anyway, can you imagine the Congress getting rid of child tax and education tax credits? Neither can I.

Also (christ, this email is getting long), there is this bill that Republicans keep blocking which would allow the IRS to calculate everyone's tax liability after answering a questionaire, which would save everyone a lot of time and hassle in paying income taxes. The Republicans block it so that paying taxes is especially annoying... (Forget what the bill is called and what the exact measure entails, however...)

Friday, July 30, 2010

Institute for New Economic Thinking

Btw, I contacted George Soros's new Institute for New Economic Thinking (INET), meant to promote change in economics, and they said they won't fund blogs, even heterodox blogs which review textbooks. They also said it isn't a liberal organization, which I guess should be clear from this guy and see harold uhlig here.

I remember when harold uhlig presented an argument that US cap gains taxes were near the laffer curve inflection point when higher taxes would reduce revenue. What was the mechanism? Higher Cap gains in that model dramatically reduce the size of the economy, thereby reducing taxes... Except, cap gains have been cut dramatically since the 90s, and, shockingly, no dramatic growth has ensued.

Awful Krugman Post

Paul Krugman posts today on Japan, and it was not up to his usual high standards. He says the lessons from Japan's 17 years of deflation are:
1. Deflationary traps are real, because fighting deflation is really hard — just printing money doesn’t do it.

2. In the face of deflation, central bankers are remarkably creative at finding reasons to tighten. That doesn’t mean that they actually prefer deflation.
But we cannot really say that we learned that "just printing money doesn't do it" b/c Japan only printed $300 billion, and when they did, their economy briefly got better, at which point they foolishly reversed the policy, at which they fell back into recession. Maybe printing money doesn't help get rid of deflation (I don't see how this can possibly be the case, however...), but there's nothing in the Japan case which shows this. The raw correlation says precisely the opposite -- that printing even small amounts of money, such as $300 billion, has large effects, as during Japan's QE stage, deflation went from 1% to 0%, although of course that's just correlation...

#2 is spot on. The utter stupidity of our Fed is really something to behold... Nevertheless, it pales in comparison to the utter stupidity which has gone on in Japan for the past 17 years, or in Europe. The economics profession is a failed enterprise.

Thursday, July 29, 2010

From the Mailbag...

A reader asks:
I’ve been asking myself these late months, what to do to become a self-taught economist? What do I need? What books, what manuals should I read? Is it even possible? Should I just forget about it or seek and admission in a real economics PhD program. I took many classes in economics (International economics, introductory micro and macroeconomics, advanced macroeconomics, international finance etc).
I think this very much depends on what your goal is. Do you just want to know about economics and the current situation? Then read the blogs -- Paul Krugman, Brad DeLong, Matt Yglesias, Tim Duy, Econobrowser, Rortybomb, Chris Blattman, Calculated Risk... These blogs mention other books, articles, and blogs which are also good to read. You could also try reading academic papers, but you'll need the math and so it'll be a huge time investment and you'll only understand economics slightly better, so I think you'd need to ask yourself why you are doing it. One thing you might do is download syllabi on what field you want to learn more about, and then read through the papers. It was really when I did this for my own field that I realized that my field has major, major problems. I've seen syllabi from highly touted programs which didn't include a single decent paper.

Tuesday, July 27, 2010

Lauren Lyster has been talking to the "right" economists...

Well done Lauren, don't let our media fear-monger us into short-term deficit cutting...

Economists Responses to Crisis of 2007

Here's a nice article by Philip Mirowski on Economist's responses to the crisis of 2007. Here's a bit:
As late as February 17, 2010, the PBS Newshour gave a platform to Chicago economist, Cato Institute member, and financial consultant John Cochrane to simply assert that government spending has no net effect on the economy. Insiders to the profession know this as “Ricardian Equivalence,” but that is tantamount to insisting, “You can’t fool Mother Market.” But fooling the Market was how the crisis developed in the first place. You should view the segment for yourself to gain an impression of the smug demeanor of someone who has drunk the Kool-Aid a little too avidly. I had to check my browser to make sure I wasn’t watching a clip from the Colbert Report. Perhaps Cochrane and I had been living in parallel universes over the previous two years. Just one representative quote: “The economy can recover very quickly from a credit crunch if left on its own.”19 Maybe in the Chicago Wormhole Universe. The real questions are: Why do the intrepid journalists of public television think that giving this guy a platform is “balance” in reporting? What set of social institutions has led us to accept that we have to keep getting exposed to this utterly predictable but uninformative stuff from economists? Where is Keynes when we really need him?
Only note is that even full Ricardian equivalence implies that government spending increases GDP in the short run, as fully rational, forward-looking actors reduce their consumption by a small amount each period offsetting the expected future tax hikes. The problem isn't even just in these guys' models, it's that when their models conflict with their ideology & emotional leanings, of course they side with their ideology and emotional leanings. That their models, such as Ricardian equivalence, are also simplistic and flawed (agents aren't perfectly rational or forward-looking, and don't know what's going to happen in the future in any event), is another issue entirely.

I give him props for acknowledging "Economist for Firing Larry Summers" as being one of the "better quasi-anonymous blogs".

Wednesday, July 21, 2010

This is Why Ben Bernanke Should Not be Fed Chairman

Bernanke conceded that he's worried about the economy, but won't do anything to help it. As a result, the stock market is down.

Ben Bernanke, world-class fool.

If you're worried about the economy, and you're the Fed Chair, then you should do something, or at least pretend the economy is fine while you do nothing. Saying we're all screwed but we're going to do nothing is the worst possible combination of statement-action available to him...

Top 50 Paid Athletes...

This is an old list, but still interesting. Total salaries are about $1.3 billion. Surprising thing to me is how little top NFL stars make in relation to basketball players or golfers, since the NFL is far and away the most popular sport in America, and I suspect this is true even in corporate boardrooms. There were no NFL players in the top 8, and only two in the top 20.

Other surprise is how much the top golfers get in endorsements, although given the demographic who follows golf, perhaps it shouldn't be surprising. Given that the playing lifetime for golfers is longer, however, it wouldn't be difficult for Tiger to be the richest man in the world if he wanted to... I wonder how much of this is owed to the fact that, before the scandal, Tiger was popular everywhere whereas Peyton Manning is very popular in Indianapolis but decidedly less popular in New England, Jacksonville, or Houston...

Crazy Kenny (Rogoff edition)

Krugman is right, again, this time that this Op-Ed by Ken Rogoff is just awful.

Strangely, he writes: "there is a growing chorus for indefinitely sustaining aggressive post-crisis fiscal stimulus." Really? From my vantage point, it seems almost certainly that we will not see any more stimulus in the US, and if we do, it will be small. Secondly, who is part of this "chorus" advocating for "indefinitely sustaining aggressive" stimulus? None of the main stimulus proponents, such as Krugman, advocate this.

Rogoff warns that if the US does another "panicked fiscal stimulus", such as another $150 billion aid to states and continued food stamps and unemployment benefits, that "Even the US is likely to face a relatively sudden fiscal adjustment." WTF? That's crazy.

There's also no criticism of the Fed or of the Japanese central bank in the whole piece. And the guy is a Harvard professor. And yet he writes things like: "a panicked government fiscal surge is far more likely to destabilize the nascent recovery than to nurture it."

This article reminded me of the angry, emotional letter an upset Rogoff sent Stiglitz back in 2002, in which he wrote things like "we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better," in response in part to Korea, which the IMF forced a balanced budget amendment on. One of Stiglitz's big bones of contention, of course, was capital market liberalization. The IMF has now changed course and no longer makes country's in trouble adopt this as a precondition to get loans, somewhat vindicating Stiglitz... In some sense, though, this Op-Ed is worse, as although for Korea in the 1990s, since it can devalue, the effects of austerity were counterbalanced by the stimulative effects of a much cheaper currency, meaning that Korea could just export its way out. The same logic does not apply to the US today, however...

Even sadder is that he is also on the advisory board of George Soros's INET, which is supposed to change the field of economics. I see other theoclassical economists on there too, such as Harold Uhlig. I've got two CV's, one for conservative eyes, and another for liberal eyes. I think when I apply for a fellowship from INET, I'll send in the conservative one...

Economic Blogging in Japan

I've often wondered what the hell Japanese Economists think about their situation. I've been tearing out my hair at our Fed, and this has only been going on for about 16 months. Japan's needlessly been stuck in a liquidity trap for 16 years, for no better reason than their central bankers are completely incompetent. So what do they think? Well, once at an economics conference I met a guy who was both Japanese and a Monetary Economist, and his answer was that he hadn't really thought about it.

Here's a couple blog posts I came across. The first seems to be saying that if Japan prints too much money, then they'll have to deal with too much inflation. Well, yes, but then they can just raise interest rates. So that's much less of a problem than Japan's had the past 20 years. Another post on the blog talks about how, even with inflation, Japanese might still worry about the problem with aging society/saving for the future and structural problems, but the fact is, before deflation, Japan was converging on the living standards of the US and Western Europe rapidly, and since they've been stuck at around 2/3rds (perhaps higher gdp per capita than some of europe, but by working waaay more hours)...

The second post translates a few of my posts, which is obviously quite sensible.

Unfortunately, you if you can't read Japanese you might have trouble with those two posts...

I like the way they write "Thorstein Veblen" in japanese: soosutein bueburin. Nice ring to it.

Tuesday, July 20, 2010

Cowen Digs Himself In Deeper...

I like Tyler Cowen. He must be one of the smartest, best informed conservatives around. Yet, in persisting in arguing against Paul Krugman that the German case in the early 90s, when Germany was nowhere near a liquidity trap, tells us anything about today, when we are in a liquidity trap, leaves me scratching my head.

Krugman wrote: "Fiscal stimulus is what you do only if two conditions are satisfied: high unemployment, so that the proximate risk is deflation, not inflation; and monetary policy constrained by the zero lower bound."

Simple enough and true.

Cowen writes: "the zero bound is not required to drive the main arguments that fiscal policy is effective with unemployed resources. So historical examples with a non-zero bound and ineffective fiscal policy do count against fiscal policy."

Except, they don't say anything about the effectiveness of fiscal policy in a liquidity trap, which is the only time fiscal policy should be used. So, they don't count against fiscal policy. They say fiscal policy shouldn't be used in normal times, which is what we all agree. Now we're constrained at the lower bound, so the usual logic is reversed.

For this, Cowen needs to be "noogied". Badly. Tyler, don't be a dead-ender...

Yglesias Ponders why the Fed is Pondering What its Job is...

Yglesias smartly notes that Fed policy is not actually all that complicated. If inflation is below target, has been for some time, and is expected to be below target in the future, you loosen policy. Especially if you're at 9.5% unemployment and expect to have high unemployment for the foreseeable future. Rocket science this isn't.

Somehow, the Fed doesn't see it that way. They see their job as being a very complicated one which requires lots of waiting for new data to come in, and careful examining of various moments from esoteric indicators while not putting too much emphasis on inflation or employment. I think this is what happens when you put academic economists in charge of the Fed. These people are trained to think that Macro is a inherently a horrendously complicated and difficult subject when it isn't, really. Sure, it may look to a layperson that, for the past 15 months, the case for looser policy has been obvious, but, the Fed wants to say, it's actually really complicated.

The other thing which academic economists have, which is clear from the article Yglesias linked, is completely unrealistic expectations about what mere Fed signaling can do in the absence of any concrete action to change private-sector inflation expectations.

Harding reports that of the first two things the Fed might do in easing policy, "Neither is a drastic move but the Fed will expect quite a strong signaling effect from its first change towards looser policy."

But why would this be the case? If it has taken the Fed this long to take small steps, why wouldn't the market assume that once the Fed took these small steps, they are very unlikely to do anything more unless the market collapses again? It's really hard for me to see the Fed acting again until another six months of unemployment come in...

Here's a final exam for Macro at Princeton. (First thought was that it actually looks quite easy compared to some of the shit I've been subjected to...) Still though, the way economists are trained is very clear -- they are trained to do math, short proofs and fast algebra, and that's about it.

Given Bernanke's difficulty with setting rates, Sims might want to include a multiple choice question on future exams:

1. If inflation is below target, has been for awhile, and is expected to be below target for the next two years, while unemployment is expected to be above 8% for the next two years, should the Federal Reserve:
(a) do nothing
(b) raise the discount rate
(c) loosen
(d) engage in word games about the duration of how long we will have low rates under the misconception that all-important expectations will magically change.

Monday, July 19, 2010

Economists Blogging about the Fed

Econobrowser has a nice post in which he invites three young leading macro-economists to post on the topic of whether the Fed's inflation target is too high or not.

Predictably, however, the post was a total disappointment. According to the authors calculations, "The optimal inflation rate implied by the model is 1.2% per year."

Wow. That's pretty low, isn't it? The authors, predictably, do not grasp that if the Fed predicts 1% inflation and does nothing to get us to the "target" of 2%, then for all intents-and-purposes, we've got a 1% inflation rate. There is also no discussion about what I believe -- that the lower bound only matters because Ben Bernanke has a personal distaste for QE. They also write that if the Fed set an inflation target of 0%, then the zero lower bound would bind 15% of the time. This sounds highly suspicious. With a 3.5% target, we'd be in liquidity trap territory 4% of the time. (Is liquidity trap prevalence really so insensitive to the target??? That sounds pretty incredibly to me...) The authors also write that "raising the target rate from 1.2% to 4% per year is equivalent to permanently reducing consumption by nearly 2%." Again, color me suspicious that inflation is that costly given that w/ a 4% inflation target, we would not now be stuck in a deep recession... This implies shoe-leather costs of inflation are on the order of 3-4%. In any case, I think a 4% target is much too high. If I were Chairman Bernanke, I might raise the target to 2.5%.

I have a strong suspicion that this "economic research" is driven by priors and numbers which have largely been made up.

How Bad is the Economics Profession Really?

Don't Ask.

The authors write:
"There is a fundamental flaw in the way central banks set official interest rates. This flaw has created what might be called the “low-interest-rate trap”. Low rates induce excessive risk taking, which increases the probability of crises, which in turn, requires low interest rates to keep the financial system alive. The flaw behind all this is the failure of central banks to take account of the probability of financial crises when setting interest rates."
What garbage. The trap we're in now is that the Fed is simply too stupid or uncaring to do anything about below-target inflation and above-target unemployment. Not that low rates are inducing increased risk taking and increasing the probability of future crisis. Yes, the Fed might have kept interest rates too low which helped feed the housing bubble, and now they are low b/c the economy is still depressed, but I don't see where the trap comes into play in this sense. The only trap is that Bernanke should be doing more QE and he isn't.

Friday, July 16, 2010

How Stupid Are Politicians Really?

Don't ask.

This letter from 58 Democrats in Congress to Congressional leaders is certainly one of the more confused arguments I've ever seen. Of course the letter is largely about politics -- posing as fiscally-conservative moderates -- but it contains utterly mindless policy promises: "Pointing to the effects of the financial crisis in Europe spurred by high levels of debt, the group said they would demand that spending be offset by cuts elsewhere under pay-as-you-go (PAYGO) rules adopted earlier this year. This would have the effect, if the group of 58 held together, of blocking extensions of unemployment insurance and other spending programs that aren’t paid for."

The letter goes on "America is facing a debt crisis that is threatening to undermine our economic and national security."

What a load of crap. Check out these rock-bottom interest rates...

Thursday, July 15, 2010

Paul Krugman Channels his Inner Economist for Firing Larry Summers

Sounds like a Thorstein Veblen post:)...

Thing is, the question would more properly be entitled, "What has the Fed been thinking for the past 15 months?" -- as these kind of projections have been there all along. For over a year now they've basically forecast below-target inflation and sky-high unemployment. And just didn't see this as a situation which necessitated action.

As I've posted before, we're basically right where the Fed wanted us to be at this time last year. No better, no worse.

Even Econ Columnists have a ways to go...

Lowenstein and Ubel have a well-meaning column in which they propose the solution to the obesity epidemic "we need to stop subsidizing corn, thereby raising the price of high fructose corn syrup used in sodas, and we also need to consider taxes on unhealthful foods. But because we lack the political will to change the price of junk food, we focus on consumer behavior."

Thing is I think by now it's pretty clear that American obesity is mostly a function of cultural norms regarding the size of food portions. One of the first things I always notice when I eat out in America is "shit, this is a ton of food" whereas whenever I eat out in thinner countries, its "shit, I should have ordered an appetizer as well... And humans have a well-known tendency to "clean your plate". The tax should on large meals/portions... This would work as a tax on big people, of course, but on the other hand, they might be the ones who gain the most. The tax could then be used to help fund health-care/research. Tall, thin people who work out and eat a lot might lose, but that merely makes the tax progressive...

I'm always skeptical when people say that "food X is bad, America would be healthier if we ate less X" -- or that "we need to eat more of food Y." Most of these are not driven by any hard evidence. Too much salt is bad, but the Japanese eat the most salt, and are also the healthiest. (They also eat less overall...) So, I just looked up some research on salt. The authors have a strong conclusion:
"High salt intake is associated with significantly increased risk of stroke and total cardiovascular disease. Because of imprecision in measurement of salt intake, these effect sizes are likely to be underestimated. These results support the role of a substantial population reduction in salt intake for the prevention of cardiovascular disease."

Also made me want to cut salt out of my diet completely.

But wait a minute, "is associated with" -- you mean there is just correlation? Of course, there is also stronger correlation between health and drinking expensive wine, but concluding we should all go drink expensive wine is clearly a reverse-causality finding...

The paper goes on to write: "So, Validation of these predictions by a randomised controlled trial of the effects of long term reduction in dietary salt on morbidity and mortality from cardiovascular disease would provide definite proof. At present, a study of this kind is not available and, in fact, it is extremely unlikely that it will ever be performed because of practical difficulties, the long duration required, and high costs."

And therein lies the problem. Salt sounds like a villain to me. Definitely, let's cut salt intake somehow. Tax it! But as the paper itself states, there just is no definitive evidence that salt is a villain. Definite proof that if Americans cut their salt intake by 2/3rds, it will reduce blood pressure, but no hard proof that this will have any significant impact on anything. And then how do we explain salt-addicted, long-lived East Asia? But with salt, at least we've got the first-stage evidence that it does something, but I suspect with many other foods which are popularly thought to be healthy/unhealthy, or which people think make them fat (such as fat itself), we haven't even got that much.

I'm still big into eating a wide variety of fruits, vegetables, fish, and limiting saturated fats, plus a multi-vitamin and exercise, but these all have a feel of cultural suspicion about them. It may not matter what you eat so much as not eating too much. Or it could be that none of these things matter, but that loving and laughing every day will keep you young. What i do with my grandparents is call them up, and try to make them laugh. To make them feel some emotion. Maybe that's the key...

In any case, I wish Lowenstein would write an article about Fed Reserve stupidity...

Wednesday, July 14, 2010

Liquidity Traps, cont.

Paul Krugman complains that nobody understands liquidity traps.

It's a good post, but he leaves out one potential avenue where printing money helps, and that's with the exchange rate and net exports. Potential J-curvature aside, printing money will reduce the value of the dollar and help exporters and import-competing firms, which should help unemployment and engender inflation simultaneously. Higher inflation makes loans and debt easier to repay for consumers and businesses...

A smaller added benefit of printing money is that it reduces the debt, as the Fed just returns all interest payments it receives to the Treasury. And, yes, this feature has a surprising free-lunch quality to it. (Most of it would likely to be reversed later on, but not all...)

Bottom line, Krugman is waaay too pessimistic about the potential benefits of QE.

Monday, July 12, 2010

Paul Krugman Steps Up


It's the first real, solid criticism of current Fed policy I've seen (other than this blog). That's been the troubling thing about this, not just that Fed policy is so bad, but that this badness goes unpunished. Universities pay thousands of professors to do economic research, and yet none of them seem to have noticed that Fed policy makes no sense.

Friday, July 9, 2010

The Fed -- the Crux of the Problem

A quick look at the Econ projections of the last Fed minutes , and we can easily see why I think there's just a very clear case to be made that this Fed is negligent.

Their projections in 2010 for core inflation are betweeen .9 and 1.2% (which look high, but this isn't important), and 9.1-9.5% for unemployment. The problem is that the Fed, with these projections in hand, read this as a situation which calls for no action at all. I'm actually curious what the point is of having an inflation target of 2% if you project inflation of 1%, and do nothing at all to get inflation to 2%. Seems like a credibility problem to me...

It's also interesting to look back to the Fed's predictions from June of last year. Looks to me like the Fed did really well, predicting unemployment to be 9.5 to 9.8% at the end of this year, and core inflation at 1.0 to 1.5%. We're still a few months away, but it looks like we have a fair chance to wind up in that range or at least close. So, it looks like things are going just as the Fed planned, perhaps even better. Yet, the Fed didn't see forecasts of high unemployment and rock bottom-low inflation as calling for anything to be done.

The Fed is now predicting that unemployment might still be 8.5% at the end of 2011, and 7.5% at the end of 2012 but, again, doesn't see anything untoward about this. It's just the natural order of things.

Underlying this, of course, must be an underlying belief in market fundamentalism. They must believe we've been hit with a real shock, and that the market should be left to adjust according to its own tune, and that the Fed is only there to prevent total armageddon. Getting us back to full employment or near to it would constitute unwanted interference with the market place. Unfortunately, it also has real costs -- as people who are unemployed long-term lose skills, suffer depression, and are wasting years in which they could be doing productive things. During this time period, firms are also cutting back on Research and Development, meaning a slower rate of technological advance. Meanwhile, China is moving ahead with 10.6% growth expected this year...

Though it's tough for me to envision Obama getting beaten, 7.5% unemployment would likely make reelection more than just a walk in the park...

Thursday, July 8, 2010

How much can the Fed help?

Krugman says, "don't get your hopes up."

Perhaps he's correct in thinking that the Fed cannot do that much, but my intuition was that when the Fed pumped $1.5 trillion into financial markets in a span of three months at the end of 2008, it did seem to have an impact.

Secondly, when Japan recently announced a paltry QE package of $100 billion, the yen actually did depreciate. This helps Japan's manufacturers, and so it employment, plus it tends to be inflationary as the price of imports rises (even if there is no complete pass-through). And imports are a higher share of US GDP than Japan's, and even with the US they are probably 3-4 times what they were back when Krugman got his Ph.D.

The Fed could also cut the discount rate -- as this "small" thing was big enough to make an impact on the dollar, which is now at .75, and in the last Fed minutes, several governors wanted to raise it again. It could also stop paying money to banks to hold money at the Fed -- which they are required to do anyway. This is "free money" for the banks, and encourages them not to lend. (And I could understand why this was done in the heart of the financial panic, but not why it continues...) Plus, it could still use traditional monetary policy and cut the Federal Funds rate, which is at .25 to either 0 or .05%. And, no, I don't believe this would be problematic for technical reasons.

Bottom line is that if the Fed announced, tomorrow, $500 billion in additional QE, I would be shocked if 1) it was not accompanied by a Wall Street rally, 2) the dollar did not fall by at least 1% vs. other major currencies. Which isn't saying it shouldn't do more. But what it can do is not limited to that.

Both the people at the Fed and Krugman seem to have unrealistic expecations about the power of inflation targeting, and, in general, the power of words when they aren't backed by anything. Krugman is correct that the Fed should have a higher inflation target, but I think the larger problem now is that the Fed hasn't showed a willingness to actually do anything to hit its already too low inflation target. Hence, the Fed using stronger language about "extended low rates" isn't likely to make many consumers go out and spend.

Krugman is correct not to get our hopes up though. Whatever the Fed does, it will be extremely measured, and it will not be enough to get us back to low unemployment anytime soon. From the Wapo article, on QE, the "Fed leaders view such a strategy as likely to have only a small impact on the economy and as carrying a risk of slowing growth."

Risk of slowing growth? How's that exactly?

Wednesday, July 7, 2010

Appointing Bernanke not a mistake?

I love Matt Yglesias, but I'm curious why he writes that "I’m not sure that re-appointing Ben Bernanke was a mistake."

For over a year now we've been in a situation where inflation is less than the Fed's target, where expected inflation is less than the Fed's target, and where unemployment has been at 9.4% or higher.

Consensus estimates are that unemployment will still be above 9.25% this December, and that inflation will be under 1%. Ben Bernanke sees nothing wrong with this scenario, and is unwilling to risk inflation hitting the Fed's explicit target in order to get lower unemployment.

What does Ben Bernanke need to do for it to have been a mistake?

Let's not forget that politically, I'm fairly certain getting rid of Bernanke would have been smart, since Bernanke was linked both to President Bush and the financial crisis, and could have been (perhaps should have been) a scapegoat. Not that the financial crisis was all his fault, or even that it wouldn't have happened under other central bankers -- indeed, for all his faults he's much better than his counterparts in Japan or Europe -- but that he did make clear mistakes, and in fact was continuing to make mistakes during the debate on reappointment, mistakes he's continued to make. Namely, that he's perfectly fine with below average inflation and long-term high unemployment.

The one thing going for him is that he might have more authority with the rest of the right-wingers on the FOMC than would a new appointee, which is what really makes the Obama administration's feet-dragging on FOMC appointments so egregious.

Then we've also had Bernanke reminding Congress it has the power to repeal Social Security and Medicare, calling for cuts in Congressional testimony... (Coupled with his nonchalance about high unemployment, this is really egregious...)

And earlier this year he raised the discount rate. You might say this isn't the most important Fed tool available, but the dollar did strengthen on the news, which is bad news for US jobs.

So, sorry, I totally do not see the merits of Ben Bernanke. I'm pretty sure he's been a total disaster.

Tuesday, July 6, 2010

David Brooks hasn't been reading his own newspaper...

He writes that it isn't clear the stimulus worked, because the economy hasn't gotten that much better, despite the case that "it is certainly true that the fiscal spigots have been wide open."

Except, you know, it's not. How can this be true given a $780 stimulus!!!! Well, deduct the AMT patch and we're near just $700 billion, and then consider that perhaps $420 billion of that has been spent the past two years, and then that state and local government budget shortfalls were about $400 billion over the same period, and we're left with fiscal spigots open to the tune of $20 billion...

This isn't the first time Brooks has gotten this wrong... When the stimulus was announced, Brooks wanted it to be trimmed on the grounds that state governors with a $400 million dollar deficit would suddenly be faced with $5 billion in stimulus funds... even though elsewhere in the same newspaper on the same day one could read about massive budget shortfalls, layoffs, tax hikes and budget cuts at the state and local level...

In any case, his article just gets worse and worse as it goes along, he writes: "In fact, it’s very hard to get money out the door and impossible to do it quickly. It’s hard to find worthwhile programs to pour money into."

Well, we seem to have been through this before, haven't we? No less an authority that Chair of the Harvard Economics department bashed the stimulus for not being timely, having convinced himself that the recovery from the deepest financial crisis since the Great Depression would be swift, and hence, that most of the stimulus would come years after the recession is over. Although i agreed at the time that the stimulus funds should have been spent more quickly (and they could have), at present there does not appear to be any problem with the spending timeline, given that we are still at 9.5% unemployment despite rock bottom federal funds rates. Second thing, when you've got state and local budget shortfalls, giving states and local governments money creates immediate stimulus which will almost certainly be spent by the end of the next calendar year, for what it does is prevent tax increases and budget cuts, both of which are contractionary.

And Brooks is the most intelligent conservative commentator on the planet. Give his article a read though, it's really quite comical. What's also strange is that after this diatribe against stimulus, at the end of the article he writes: "First, extend unemployment insurance; that’s a foolish place to begin budget-balancing. Second, you need to mitigate the pain caused by the state governments that are slashing spending."

OK, but there's a $300 billion stimulus right there...

Then Brooks pulls a 180 again and writes: "Don’t be arrogant. This year, don’t engage in reckless new borrowing..." But, he had just written otherwise! How are we supposed to give aid to states and extend unemployment benefits without borrowing money?

Earlier in the article, Brooks berated liberal economists for "having total faith in their models." But of course, one thing models have over using your gut is that they are logically internally consistent. Instead of using models, Brooks uses his gut, which tells him that 1) These liberal economists are full of shit and therefore we should not do stimulus, 2) we should do stimulus to states and the unemployed, and 3) we shouldn't issue more debt.

But of course, my model says these are mutually contradictory...

Saturday, July 3, 2010

Soccer, a thing of beauty... (an aside...)

Is it just me, or was the World Cup's Quarterfinals amazing this time around? We had arrogant Brazil humbled. We had a crazy last minute in Uruguay-Ghana. And today, we got to watch as two of the best players on the planet, Messi for Argentina and Xavi for Spain, play amazing individual soccer in a way which spelled disaster for Messi's Argentina and should have for Xavi's Spain... What do I mean? Both players are hyper-creative. They make the ball dance as they weave to-and-fro, they are great at making guys miss, and no one watching can take their eyes off of either. The trouble is, as Messi's got the ball on his foot, everyone watching as he makes the thing dance, the Germans had plenty of time to line up 9 guys between the dancing ball and goal. As soon as Messi would lose it, the Germans, who couldn't do with the ball what Messi is capable of, would immediately hit an outlet pass and then it would be off to the races. While Messi would 12-touch the ball stylishly, Schweinsteiger would one-touch it to Ozil who would hit Klose who would then score. Wham, bam, thank you mam. Argentina possessed the ball for nearly the whole game, yet Germany had all the scoring opportunities. When Argentina gained possession, they'd pass the ball around the back, and then bring the ball up slowly, each player adding his own "creativity". Then the Germans would get and attack immediately!

It was a total bloodbath. To a man, the Argentines looked the better team. Yet they each played in a stylish fashion which made the whole rather less than the sum of its parts. You get the feeling that if Germany played Argentina again tomorrow, it might be 6-nil. And this despite Germany lacking any Messi or Xavi-quality players...

Proving it's not just Greg Mankiw that writes stupid stuff in the grey lady, check out this atrocious apology to Diego Maradona which calls him "a rollicking genius". The guy took what might be the most talented team in the tournament and got beat four-nil (which would be like being beaten 42-3 in American football). A team which only needed a coach to scream, as mine did, "get the ball off your foot!" Of course, great players are often given license to take more touches than more mortal men. Maradona was famous for dribbling it past the whole of England's defense and scoring the goal of the century. But what's missing is all the times Messi and Tevez tried to recreate that infamous highlight, schooling three defenders only to get schooled by the fourth. Maradona the player had great instinct on when to get rid of the ball, of course, but what we saw today was his players all trying to school Germany and individually score the goal of the century, and in the process, they were repeatedly laid bare and ultimately humiliated.

The exact same thing can be said about Spain, to a slightly lesser extent, against Paraguay. In the first half, Spain had most of the possession, Paraguay the scoring opportunities. The Spanish do a bit more short passing, but the likes of Xavi in the midfield also love to make the ball dance, and several times Xavi -- who John Harkes says might be the best midfielder alive -- was dispossessed of the ball by the third Paraguayan defender after stylishly beating the first two. At this point the Paraguayans would do what the Germans do -- spread the field, hit the outlet, and then the outlet would hit their striker with an air ball at the penalty spot, 2-3 passes and 3-4 seconds later. While this didn't always work, it did create serious scoring opportunities. Then the spanish would get the ball, make it dance, string together 20-30 passes and just as many needless touches, and find themselves trying to get it past a gauntlet of 9 Paraguayans in the box... Of course, the Spanish weren't nearly as bad as Argentina at taking needless touches, and they did do some quick counterattacking -- that's how they scored. And Paraguay wasn't nearly as good at counterattacking as Germany, which shows there is some risk to the immediate counterpunch -- you're more likely to lose possession quickly. Still, though, Spain was the waaay more talented team, yet were lucky to win.

One wonders if they've learned anything though. Most likely, it will once again be a bunch of talented individuals (Spain) against an actual team (Germany). It'd be a brave Spaniard that puts money on Spain in the Semis...

Sounds like someone needs a new political team...

From Jackie Calmes:
In Mr. Clinton’s day, the economic team, asserting that a credible commitment to fiscal responsibility would reassure financial markets and lead to greater long-term growth, won the argument in favor of deficit reduction, helped by moderate Democrats in Congress. These days, the Obama political team has the edge, again in the cause of emphasizing deficit reduction and with an assist from Congressional Democrats nervous about the midterm elections.

I'll have to say, from my own time in DC, I was also unimpressed with elements of the Obama political team, but that's a story for another time... Let's just hope Obama faces someone completely inept in 2012, which isn't all that unlikely.

Remembering the Good Ole' Days...

Let's not forget those, like Greg Mankiw, who argued against the stimulus. Here he argues that Government spending was "too easy an answer" after attacking the stimulus on his blog for not being timely.

Now, of course, over half of the stimulus money has been spent, and we're still not quite out of the woods yet. Mankiw, and Brooks who he approvingly linked, were worried about that third of stimulus spending which happens in FY 2011, which is now less than three months away. Although I was also angry that so much of the tax cuts didn't come right away (and that it included the AMT patch), more spending in FY2011 doesn't seem a bad idea about now, does it?

The other thing which is funny about Mankiw's article is when he wrote, about the stimulus, disapprovingly, that "the centerpiece is likely to be a huge increase in government spending." Of course, due to huge cuts at the state and local levels -- the pothole-filled highways near my house have not been repaved recently, and given state budget troubles, anytime soon -- this huge increase in spending never happened. What happened is that the Federal stimulus basically just canceled out cuts at the local level, which was perfectly predictable at the time.

It's also become increasingly clear that the big problem with the stimulus was not the timing, but the size. Another $300 billion allocated to states and local governments to prevent tax hikes and budget cuts, and we'd be living in a different world right now. A world with less potholes.

Of course, defenders of Mankiw and Brooks might say, "How could you possibly have known that the recovery from the deepest financial crisis since the Great Depression wouldn't be quick and easy?" Well, that really took a crystal ball now, didn't it?

And, as for Stimulus Round II, intrade now has a 34% chance of there being another recession in 2011, and 37% in 2012! And it has unemployment above 9.25% for this December... With the Fed unwilling to act, I think the case is clear for more stimulus. I would do another round of large stimulus checks before the mid-terms, and then send another $300 billion to states and local governments, sent out immediately. In this way, the central government can say they "disbursed" the entire stimulus in one month, and the checks to individuals will hit soon, and even if the money sent to local governments doesn't affect budgets until this fall or next spring, it will still have been plenty "timely".

Before, I was luke-warm on a second stimulus, given that Bernanke had ended QE and raised the discount rate back in January -- thinking if Congress did more, he'd do less. But now the way I see it is that if Congress does nothing, neither will Bernanke, and if Congress does something, Bernanke won't do anything stupid unless we get some really good economic numbers. While this would crowd out the effect of the stimulus, we have no idea if we're actually going to get good economic numbers, and so it's better to safeguard against the alternative.

I'm Back...

W/ apologies for being gone.

For my money, the interesting thing right now economically is that there hasn't been more heat put on Ben Bernanke.

As I've written, I think the case for more QE has been relatively clear for more than one year now. The frustrating thing is that even as new economic data come in which show that inflation is subdued and unemployment is not, there is no change at all in Fed policy. Bernanke believes in the same policy Wednesday as he did Monday, no matter what the BLS said Tuesday. In normal times the Fed almost certainly would have responded to the events of the past few months -- Greece, deflation, poor manufacturing and employment numbers -- by cutting the Federal Funds rate. And Bernanke's only response is to say that all he's gonna do is keep rates low until things get better. The problem is, this might not be enough.

With inflation since January a whopping 0.0%, and unemployment down to 9.5% thanks to a shrinking of the size of the labor market, the case for more Fed action could not be clearer. Of course, it could also not have been any clearer back in January, when unemployment was around 10% and core inflation around 1%, or last summer, when unemployment was around 9% and growing, and core inflation was around 1%.

To me this seems like gross negligence. Sheer, senseless incompetence -- almost like leaving a gas burner on when you leave for work, only doing it on purpose.

This means I must be crazy because it also seems like Ben Bernanke has come under only very sparse criticism, even from liberal bloggers. (Matt Yglesias being an exception...)

It was hilarious to see Yglesias criticized by a Ph.D. Fed economist awhile back on the grounds that since Yglesias hasn't completed a first-year Ph.D. algebra marathon, he cannot understand the complexity of macro, and therefore has nothing to add. Except he's been one of the only voices brave enough to call a spade a spade.

Sometimes, Macro is not that complicated. Inflation is low, unemployment is high. Therefore the Fed should do more. That's it. Were we to start seeing more inflation and/or fast employment growth, then things would start to get more complicated, but we're not there yet.

Thing is, the Fed employs all these economists with Ph.D.'s from fancy institutions, who write down extremely complicated, intricate models backed by sophisticated computer simulations which they spent years meticulously creating, and yet they apparently cannot grasp concepts so simple, a five-year old can understand it. Of course, it's not just Ben Bernanke and his Fed Economists that cannot understand it, but it's also a bunch of others in the media, including liberal econ bloggers who haven't really written much at all about the Fed's lack of policy response to continuing high unemployment, deflation, and the debt crisis, the economists who contribute to columns like voxeu, and Monetary Economists all over the world. These people have no idea what they are talking about.

So, if I'm so smart, then why is Ben Bernanke Fed Chair, and why am I still a grad student blogging out of my student housing?

I'm not sure I know the answer to that, but it's become increasingly clear to me that the only kind of intelligence which gets anyone anywhere is emotional intelligence. Being able to sound smart, to play-act a certain role. Introducing the right bit of jargon at the right time to feed the impression that you know something other people do not. Connecting with people on an emotional level. Coming across as alpha-malish. Bringing the right energy level.

In economics seminars, of course, this is done by introducing a complicated model. A model which, as you click through it, is too complicated for anyone to really follow except for maybe the guy who happened to have worked on the same topic. But, of course, teaching people something is not the point of an economics seminar. Showing other Very Serious People that you work on hard topics with lots of math is the point of economics seminars, which is why these things are a waste of everyone's time.

But I digress. My fears last fall -- that Ben Bernanke should not be reconfirmed as Fed Chair -- have, unfortunately for millions of jobless Americans, proven prescient. Fed policy has been awful, and apparently almost nobody has noticed.