Executive Pay and the Superstar Effect...

I imagine this article will be extremely influential among the masses of New York Times readers. The basic problem with the theory that the bigger are the markets, the more superstars will make, and this accounts for the dramatic rise in inequality in the US since 1980 is that it does not fit the data at all for other time periods or other countries, unless one is very selective with said countries and eras.

The article starts out with the stories about how, with television, the Yankees pay their players more because the potential market is bigger. OK, TV audiences are probably much larger than the 1970s, but let's apply the same logic to ticket prices. New York has roughly the same population in 2010 as it did in 1970. The highest priced ticket in 1970 was just $22 in today's dollars, adjusted for inflation. Today, the highest-priced ticket is $2,625. Again, that clearly has nothing to do with larger markets. And the increase in the most expensive ticket unfortunately "over-explains" the increases in players' salary, who haven't experienced 100+ fold salary increases.

Inequality was bad in the 1920s. After the New Deal, inequality was basically unchanged until the 1980s, despite the fact that corporations, profits, and big media, television, et. al. and company's market capitalization were much larger in 1970 than in 1933. Second problem is that Japan's economy grew like wildfire from 1946 to 1992, and nothing special happened to inequality. Mainland Europe and Korea also do not fit the pattern. Canada, Australia, New Zealand and the UK basically only fit the model for some time periods -- i.e., since 1980 for New Zealand and the UK (Reagan-Thatcher revolution), Canada and Australia only more recently.

Thinking of writing your thesis on this? Well, there's already a Temin paper which basically explains all of this, and showing that institutional factors were largely at play. And yet, the "Superstar Effect" is still one of those zombie ideas that won't die... Mind you, it's not to say that I disagree with the notion that as a company's market size increases, it's likely to pay the CEO or top performing workers more, holding everything else constant. It's just that everything else hasn't been held constant in these studies which generally have as data one observation -- the US experience since 1980.

Update: The Temin "Treaty of Detroit" paper is here . Unions, taxes, and the minimum wage were are clearly three big institutional factors which changed around 1980.

Oh, no he didn't...

Just freeze pay for federal workers. This is wrong, wrong, wrong on so many levels.

I'm still too busy to post, but this is an outrage.

http://www.nytimes.com/2010/11/30/us/politics/30freeze.html?_r=1&hp

He's surrendering before the troops have even taken the battlefield. This will hurt the economy, screw people who are already underpaid, reduce his own chances of reelection, and signal to all that this is a guy who won't stand up for his own principles.

No one has had their reputations so thoroughly tarnished, in my eyes, as the Obama economic team...

Bernanke Looking Better by the Day...

From Politico .

Opposition to the idea from five regional Federal Reserve bank presidents succeeded in trimming down Bernanke’s plans for $1 trillion in stimulus to $600 billion, he said, and could end up blocking some of those bond purchases if there are signs of inflation.

“Bernanke’s facing a lot of opposition [on the Fed board] that is not ... evident in public,” he said.

Would have been nice to have those FOMC appointments sooner, Obama administration...

The Republican Party has wasted no time in "working the refs" so-to-speak. Where are Democrats? Where is the CEA? Are they all just going to sit back under the assumption that monetary policy shouldn't be politicized, while Republicans politicize it?

One Reason QE2 Might Work Better than it "Should"

"The Seven Deadly Ingredients to the Coming US Hyperinflation" .

If you think it's just wingnuts saying this stuff, you'd be wrong. First off, lot's of people do watch Glenn Beck and Fox News, which are reporting that the sky is falling. Secondly, this shit is also in the NY Times, the Wall Street Journal, it's everywhere. Inflation expectations have changed.

Does the Fed do any robo-polling on inflation? They should... If they do, I suspect they just sent expectations skyward. Sure, you can also look at bond yields...

What do Conservative Economics think of QE2?

Besides the atrocious letter in the WSJ against QE2, I do wonder what the other conservative economists think about it. What does N dot Greg Mankiw think, for example? Nary a word on his blog. It will be interesting to see how many line up with crazies...

Newsflash: Europe in Trouble!

See this .

For all the talk about how this shows that the Euro was ill-advised, I tend to think the real problem is that Jean-Claude Trichet is an idiot, and that's the whole of it.

Europe still hasn't even lowered their key interest rate to zero. Just like Bernanke here, the ECB has continually "guessed wrong" and had monetary policy which is, in retrospect (as it was in real time), clearly too tight. Even now the key rate isn't even zero. One novel way they may help to avoid an Irish default is to lower their key interest rates! Had they done this two years ago, there may not have been any solvency problem in the first place.

It's hard to know why exactly officials from Berlin to Tokyo have been so enraged over QE2, but one thing it suggests that these are people who don't know which way is up.

"Summers Cast as Dysfunctional Force"

Read it here.

Revelations are that he opposed the Volcker rule, second that he nixed the jobs tax credit, and third that he strong-armed the EPA into not treating coal ash as a hazardous waste.

Surprising he didn't just suggest sending the non-hazardous coal ash to third-world countries, which are inefficiently under-polluted given that their meager incomes make it impossible for them to be able to put high dollar-values on not living near toxic waste.

How long before Larry-I'll-let-you-know-Ken Lay-if-anything-helpful-for-Enron-crosses-my-Treasury-desk-Summers picks up more "adviser" fees from the financial or coal industries?

In any case, the article says nothing about Summers' role in the three big economic policy mistakes of this administration: 1. The small stimulus, 2. Reappointing Ben Bernanke, 3. The fateful (by which I mean stupid) decision to wait for nearly two years on an FOMC appointment, when the rest of the FOMC is stocked with crazies. I would guess the reason is that the people who are dishing on Summers now don't realize these were mistakes, or else they too were on the dumb side of these horrific lapses in judgment which have helped to make Obama the great failed hope of our generation.

Yes, yes, we "got" health care, but still, a once-in-a-lifetime opportunity has been squandered, and Larry Summers is a key villain. As much as I've got it in for Summers, though, I'd have to say Harry Reid/the White House's political people probably deserve as much if not more blame. They clearly should have just worked to pass the best policies, not to senselessly go after bi-partisan compromises. They could have pushed through as much as they wanted, for no one cares about Senate "process", instead they settled for a few (important) but watered-down bills. They did a lot, but given that we had a once in a lifetime majority given to us by Lehman/Palin, it wasn't enough. And thanks mostly to Summers, that majority is now history.

The Battle to Come...

Check this out.

Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Philadelphia Fed President Charles Plosser have all questioned further monetary easing, and all three will be voters next year.

While three votes fall well short of a majority on the 12-vote Federal Open Market Committee, they could pose a big challenge to Bernanke's leadership. A Fed chairman has not faced three dissenting votes since November 1992.

"It matters because it's visible," Meltzer said. "We know that Fisher and Plosser and several others are unhappy with the policy, but it's a different thing when it comes out."

Fed policies supported by a strongly split vote could be seen as more tentative and to have less staying power than policies that get the full backing of the FOMC, he said.

You take a Republican GOP refusing to raise the debt ceiling, and then you add in Fed feet-dragging due to the likes of embarrassments like Plosser, and you don't get a pretty picture...

Economists for Firing Larry Summers are back!

We've been busy. Doing what? Trying desperately, and, as it turns out, in vain, to limit the damage in the midterms caused by Summers and Bernanke's mismanagement of the economy. (Can't win em' all...) The midterms were largely a referendum on how solid a grasp on economics principles Summers and Bernanke have. Have they really been "hitting the bulls-eye" as Alan Blinder is wont to say? The midterm results and unemployment rate would seem to suggest otherwise...

I'll have to give major props to Bernanke for doing $600 billion more in QE, although I'm not sure I understand why he waited until after the midterms. He wanted to appear non-political, but if he felt the economy needed a boost and held off in the interest of appearing "non-political", then the end result is that he hurt the incumbents and helped the GOP. The way to be non-political would have been to do what he felt was right for the economy regardless of the election.

In any case, at least Bernanke did more than I thought he would do, and apparently it also surprised currency traders given their reaction. And, given the adjustments in prices we've already seen, I think it is clear that QE helps. $600 billion is probably not enough, let's just hope Bernanke shows a willingness to adjust the amount when new data comes in -- a flexibility neither he or Summers has displayed so far. For it was clear 17 months ago that we needed more QE, and would have been much preferable for him to start out with an additional $200 billion then, and then up it by $400 billion if it had no effect, and then continue to adjust either upwards or downwards based on data. Instead his strategy was to do a bunch of QE almost two years ago and then essentially do nothing for the next 22 months, even though every month's data released all painted the same picture of the economy.

One of the most bothersome aspects of this is how the media continues to report on it -- it's Bernanke's "big gamble". Even the New York Times refers to QE2 as being "risky". It's just hard to see what planet these people are on. With no more QE, the most likely scenario is that we have continued high unemployment. In other words, no QE seems incredibly risky. With QE, the worst case scenario is that it isn't big enough and doesn't do anything -- the status quo. Clearly, this wouldn't represent any additional risk from the QE. It's hard to even guess at what the "risk" perceived by the NY Times is. Most likely they fear a scenario in which inflation somehow gets out of control, even in the context of slow growth and 9.6% unemployment. Trouble is, if this happens, it would most likely be accompanied by a robust economic recovery and falling unemployment, and could be met by a simple reversal of the QE and multiple interest rate hikes. In other words, this is precisely what we're hoping for -- getting out of the liquidity trap.

The real "risk" as I see it is that we'll continue to have a few more months of slow job growth and low inflation, and Bernanke will wait another 9-12 months before he makes any adjustment to the size of the QE. Then, perhaps he'll do a bit more 8 months of disappointing/marginally decent results later, in the interests of being non-political, wait until after the Presidential election of 2012 before doing anything further, while unemployment is still hovers above 8%...

Frustrating times...

Blog Name Change... Suggestions?

1. Economists for Firing Ben Bernanke

2. Economists for Giving Narayana Kocherlachota a noogie

3. Economists for Drawing and Quartering the FOMC (and then having them hanged)

other ideas?

Too Busy To Write Anything Substantive, but...

Awesome! Summers out!

Notice...

Posting will probably be very light, or nonexistent, for the next few months.

Rant against liberals who rant that Obama is a centrist...

Recently, there's been a lot of liberal rage against Obama

So, I've long been critical of the Obama administration's economic policy, but there is one thing to know -- first off, there aren't actually all that many liberal economists, and even fewer with the stature to be Presidential advisers. Yes, there's Stiglitz and Krugman, and Brad DeLong, but, to my knowledge, none of them came down on the right side of Bernanke's fateful reconfirmation. Obama's choice to go with a team including Romer, Summers, Geithner, Austan Goolsbee, and Peter Orszag was a choice for Democratic economists with some sharp (or very!) sharp CVs (plus Jared Bernstein...). (How many of us have got "tenured at Harvard in our mid-20s" on our resumes?) Obama himself is not an economist and couldn't possibly have known about the Dark Ages economics has sadly fallen into the past few decades... And Summers published some extremely populist Op-Eds in 2009, rants about Bush Administration tax cuts and inequality, the kind of thing no liberal would have any qualms about, with an explicit eye toward appealing to candidate Obama.

I think that says Summers thinks Obama is a liberal. And I think it also makes it a touch more difficult to blame Obama for what were the key mistakes -- the reappointing of Ben Bernanke (which was supported by both DeLong and Krugman), the feet-draggging on the FOMC appointments, and the small stimulus. Obama deferred to the "experts". The experts turned out to be medeival priests on the key issues, even though these are not low-IQ, unqualified people. Then there's health care -- Obama did not give Summers control over health care, and the constraint on getting a more liberal health care bill came in the Senate, not from the White House.

Point is there just aren't that many doors President Obama could have knocked on to get competent advice on all three of these issues. And there are very, very few economists over the age of 35 who are ever worth listening to. More liberals need to get Economics Ph.D.'s instead of Anthropology or History Ph.D.'s if they want to shape policy (that's why I switched from Poly Sci/Law to econ), and we need to have more liberals who've got "Goldman Sachs VP" on their resume as well...

Boehner calls for Summers' resignation

House Minority Leader John Boehner (R-Ohio) will call Tuesday for the mass firing of the Obama administration’s economic team, including Treasury Secretary Timothy Geithner and White House adviser Larry Summers, arguing that November’s midterm elections are shaping up as a referendum on sustained unemployment across the nation and saying the “writing is on the wall.”

Sucks he's basically right. That Boehner himself was also on the wrong side of all the recent economic policy debates hardly matters. Obama was elected to put the economy in order. He hasn't done that. He pushed through a stimulus which was too small, waited 16 months on an FOMC appointment, and made a stupid decision to reappoint Bernanke.

And, hate to say it, but had McCain been elected, the Republicans would have pushed through a massive stimulus containing the mother-of-all tax cuts. Republican opposition to the stimulus was largely because it was in their self-interest to oppose it (and, oppose everything obama did). Had the Democrats been in the opposition, there wouldn't have been nearly as much opposition to the stimulus. Add to that, the right-wingers on the Fed would likely have been less hawkish over the past 18 months of what I would term "very strange" Fed policy. Combine all of this, and it's not at all clear that the economy would be worse off with a President McCain at the helm.

The mid-terms are basically a referendum on Geithner, Summers, and Bernanke. These guys were simply not up to the task, and so Boehner is right to attack them.

Tim Geithner is Behind the Curve...

Alex Tabarrok and other econ bloggers (Economists for Firing Larry Summers were not invited) spent the afternoon at the Treasury, firing questions at Timothy Geithner.

Tabarrok describes Geithner's view of the Fed: "There was a recognition that the Fed could do “dramatic” things but a sense that the theory here was uncertain and untested."

I wouldn't really describe a cut in the discount rate, a 25 basis point cut in the Federal Funds rate, an elimination of interest paid on excess reserves, or another $400 billion in QE to be "dramatic", "untested", or "uncertain". On the other hand, doing nothing to hit your inflation target in the wake of a financial crisis has been tested by Japan for 17 years running and repeatedly been shown not to work.

Oh, Timmy Chimeny, Tim tim, tim teroo. We've got Tim Geithner and he says (to the unemployed) eff you! javascript:void(0)

(This was Man U.'s Tim Howard chant for those that didn't get the reference...)

How strange is too strange?

After reading Tim Duy's latest, I'm just reminded how weird Fed policy has been.

Consider that in 2004, when inflation was at 3.3%, the Fed was fine to leave the Federal Funds rate at 1%. 3.3% inflation wasn't seen as anything sinister during President Bush's reelection run. Now, however, with the CPI having increased so far this year by .2%, for an annual rate of less than .4%, we're suddenly in dire risk of hyperinflation? Isn't this just a bit too strange?

Either the Fed is as stupid as I suspect they are, or they are very competent but hopelessly in the tank for the Republican Party. How else does one explain the above?

Also, consider that in 2004, unemployment topped out at 5.8% (in March, declining thereafter). Compare that with 9.5% today. This Fed brings new meaning to the phrase 'regime switching'.

Statistics in the Hands of Idjiots...

Matt Yglesias asks "What is it about the economy?" that impacts election outcomes, and links "Enik Rising", an interesting blog by a political scientist, who finds that income growth matters but that unemployment does not matter for mid-term election outcomes.

Having done a powerpoint slide on this issue once, I can say that this issue is actually trickier than it looks. His mistakes are three: First, he looks at change in house seats as the variable he's trying to explain. So, it would make sense to include "how many house seats the president's party holds" as a control variable. Second problem is that the Democrats usually lose about 8-12 seats in midterm elections simply because the share of young people, women, and minorities all decline during mid-term elections. Of course, young people, women, and minorities all turned out at record rates in 2008, but will sit out the midterms. (Good news for Dems is that they will be back in 2012... There is a lot of habit persistence in voting behavior, but it's really specific to the type of election.) But I digress. Third issue is that there are just too few data points here, and US politics has changed too much since 1912 to gain much by expanding the series. One thing the author could do is include Presidential election years, and that would help. Also, that the Bush 02 year is a chief counterexample to the "unemployment doesn't matter" is quite telling. Obviously, 2002 was an election dominated by 9/11. The Republican gain/loss was also helped out by the fact that they only started off with a slight majority, and that Republicans traditionally do well in midterms. Control for those two things and the Republican performance in 2002 loses a bit of its luster... But there's no way, really to control for 9/11 since it was a one-time event. Which means someone needs to write a careful international paper. And when they do, my guess is that they'll find that a change in unemployment matters a lot.

After all this criticism, however, I agree with part of the bottom line, that GDP growth matters more than unemployment. Why? The big reason why the economy matters has to do, I'm convinced, not with the actions of laid-off workers but with how the media covers the economy, the president, and the federal deficit. The deficit gets covered like it's a huge scandal, and it always comes across as though the President and Congress have been reckless with the nation's finances, even though the truth is that running smaller deficits would have been much more reckless. Since GDP and the stock market rebound before unemployment, of course, this means that GDP growth is a better indicator, because media types care much more about their stock portfolios and bottom-line GDP growth than they do unemployment, which is simply a remote statistic to them.

Liquidity Trap Blogging...

On the effects of an oil price shock.

Matt Yglesias worries about the consequences of an Israel-Iran war, and concludes that, if things are bad now, just wait until we've got inflation to worry about! Except, if we have an oil price shock now, we'd be freed from our liquidity trap. This is the counter-intuitive logic whereby everything that is normally "bad" -- i.e., inflationary -- now helps the economy by reducing real interest rates. The only way an oil shock would hurt is if the Fed overreacts, and raises interest rates prematurely to head off inflation before it comes. This is more than a remote possibility, of course, but an oil price shock would at least get us back to the situation where the Fed can simply cut the federal funds rate when it wants to stimulate the economy rather than play word games with the "extended period" language.

A Rough Comment on Levitt...

Here

This comment makes three observations about Donohue and Levitt’s paper on abortion and crime (Quarterly Journal of Economics 119(1) (2001), 249–275). First, there is a coding mistake in the concluding regressions, which identify abortion’s effect on crime by comparing the experiences of different age cohorts within the same state and year. Second, correcting this error and using a more appropriate per capita specification for the crime variable generates much weaker results. Third, earlier tests in the paper, which exploit cross-state rather than withinstate variation, are not robust to allowing for differential state trends based on statewide crime rates that predate the period when abortion could have had a causal effect on crime.

Although this may look like "shocking" revelations to some, if you take essentially any major result in economics over the past 30-40 years and dig around with their data, you're quite likely to discover that the central finding is fraudulent.

Awesome NYT Fed Coverage...

The New York Times is supposed to be liberal. And yet, here they are cherrypicking quotes from conservative economists:

While that action could be helpful, it carries some risk, said Christopher L. House, an economics professor at the University of Michigan.

“If they were to simultaneously lower the rate to zero while leaving $1 trillion in reserves in the banking system, they would have a lot of reason to worry about inflation,” he said.

Of course, this logic holds if the federal funds rate is at .25. If the Fed is expecting inflation of .9% over the next year, then why should a 25 basis point cut get us to uncontrollable inflation? More likely it would shift us toward inflation of 1 or 1.1%. That's clearly some magical thinking that a 25 basis point cut, alone, would take inflation from .9% to, say, 3.4%, much less that it would happen so suddenly that the Fed would be unable to keep a lid on inflation via repeated rate increases. Did the NYT quote anyone on the other side? Anyone who thought the Fed is not doing enough? NO.

NYT, you suck!

I e-mailed "professor" Christopher L. House to explain himself, because the NYT really makes him sound like a complete idiot... No response yet.

Laffer Curve, Piled On...

Dylan Mathews surveyed a bunch of economists to find out where the peak of the laffer curve is.

Trouble is, there is no "the peak". The peak will depend on what the past rates are and other cultural factors, and in general will be different at all times and places. If a marginal tax rate moves from 70% to 50%, people will behave quite differently than if it the rate had just moved from 30% to 50%. And Greg Mankiw also made a good point, that the short-term and long-term effects can be different. Of course, what he doesn't realize is that this can go in both directions... I.e., if we declare all income over $20 million to be taxed at 99%, I think we'd all agree that Exxon Mobil will stop paying it's CEO more than that, and Phil Mickelson would do fewer sponsorships. Hence, we'd be on the wrong side of the laffer curve. But Exxon Mobil will still have a full-time CEO, and if Phil Mickelson does fewer sponsorships, then Lee Westwood or Jim Furyk will do more. Exxon will probably share more of its profits with its shareholders or other employees. In short, nothing less necessarily gets produced, yet revenues in the short run are increased. In the long run, however, this reduction in inequality would likely increase the growth rate...

I'm not saying to tax all income over $20 million at 99%, but currently we tax it at just 35%. The point is that it's very possible to be on the wrong side of the laffer curve but on the right side of maximizing economic growth.

Traders Need to read their EFFLS

From the NYT:

On top of those reports, Tuesday’s decision by the Fed to begin buying at least $10 billion a month in new Treasury securities caught some traders off-guard.

They shoulda been reading their EFFLS, and they'd have known in advance that's what the Fed was going to do...

Also, interestingly, the NYT has changed its story. Yesterday, the "surprise" announcement by the Fed led to a market rally, today yesterday's QE has caused the market to drop a lot by inciting economic fears. Hard to believe both are true. Nevertheless, I can see where both stories are coming from. It's a good thing the Fed isn't shrinking its balance sheet. But keeping its balance sheet the same size does nothing to stimulate the economy...

Predictions for tomorrow's FOMC meeting

I predict that the Fed will actually announce that it will reinvest some of the proceeds from the prior MBS investments as they come due, so there will be no net-tightening. What's more, that the Fed will see this as a major policy shift, but in reality it is far too little and it will do nothing.

However, I also see the economy getting better. Only, very, very slowly. Slowly enough that the Democrats will still get whacked this fall...

UPDATE: I hate it when I'm right!

Miscellany...

Keith Hennessy has a very interesting post on the different roles of White House economic advisers... One reason health care turned out so well for the Dems was probably that the NEC, and Larry Summers, was not in charge of it.

Matt Yglesias continues to push the Benjamin Friedman thesis, without mention the caveat which I think is the most important. That recessions tend to badly damage the party in power and help the party out of power. If the party out of power is an anti-foreigner, conservative party, then they will be emboldened. If the party out of power is led by Franklin D. Roosevelt or Barack Obama, then the anti-foreigner/race based stuff will never come into play.

Matt doesn't really provide any good explanation for why the Great Depression or the crisis of 2008 didn't result in more zenophobia (in the 2008 case, this didn't come until after Obama was sworn in). He says "Many expected racial tension during the 2008 presidential campaign, but it barely materialized." That's because the nation shifted toward Barack Obama and Nancy Pelosi and away from bankers and old conservative white guys. During the Great Depression, he says it didn't happen because 1934-1937 was the fastest period of economic growth America has ever experienced. I think this is wrong though. 1934-1937 was also a fast period of growth in Germany, what was the difference? The difference was that, in the US, the Republican Party was thoroughly discredited by the Great Depression, and the alternative, the Democrats, were much less zenophobic and against the free market orthodoxy, which meant that the nation subsequently became less zenophobic and more anti-laissez faire as the Democrats took control of government.

Romer Post-mortem

Lauren Lyster gets this right!

Romer deserves props for arguing for a larger stimulus, but she backed up her arguments with economic projections which suggested the downturn would be short and one of the lightest recessions in the post-war period, despite this being the worst financial crisis. The moment that projection was made, we here at the Economists for Firing Larry Summers pointed out that her forecasts were nonsense.

Secondly, I suspect she supported the reconfirmation of Ben Bernanke, which was a horrendous mistake. If she disagreed with it, she should have resigned then.

Thirdly, the administration waited over a year to make a Fed Board appointment. I suspect that had she really been pushing this as a priority, it would have gotten done sooner. This was a clear administration mistake, and its importance is not to be understated. The more I think about it, the more foolish I think it was.

Fourthly, she didn't "work the refs" at all. I don't get the sense that she's been out there persuading reporters and economists to attack Bernanke's patently wrong policies like we have here at "Economists for Firing Larry Summers". I suspect the reason is she doesn't grasp what the Fed's been doing (or hasn't been doing), and that she actually believes Ben Bernanke is doing just fine.

But, alas, I suspect the voters this fall will send a message to the Democrats how well they think Ben Bernanke is doing.

Romer vs. Summers

She also was reported to have butted heads with other members of Obama’s economic team, in particular Larry Summers, director of the National Economic Council. In December, the she sand Summers even seemed to contradict each other — in interviews conducted on the same day — on whether the recession had ended.

“Everybody agrees that the recession is over,” Summers said.
“Of course not,” Romer said in a separate interview.

The clash appeared at the time to speak not just to the differing views on the economy within Obama’s inner circle but also to the sharply conflicting signals out of the economy itself, which continues to struggle to rebound.

I think that shows she's got more human, and better, instincts than Summers. When unemployment has been above 9.5% for over a year and the economy is shedding jobs, you cannot try to pretend like everything is OK when you are in office. It makes you look out of touch. In Summers case, of course, he is out of touch. So it's not just framing...

So, Diamond Rejected, what now?

Recess-Appoint Jaime Galbraith and Joseph Gagnon!

(hat-tip again to sfraffa!)

UPDATE: I meant thanks to Matthew Saroff for suggesting the Galbraith recess-appointment!

Wow... Diamond Rejected...

Wow. There goes any hope for monetary policy... The article doesn't say how Republicans alone could block the appointment w/ just 41 senators in the entire senate. How'd they get a majority on the Senate Banking Committee???

I wonder if now some wheels are starting to turn at the White House. If, now, they might start to reconsider how smart it was to leave Monetary Policy to a bunch of partisan-Republicans when they could have made these appointments 15 months ago, and whether it was smart to re-nominate a Republican inflation hawk in the midst of a liquidity trap. Now, of course, apparently the Republicans can easily block any dovish appointment with just 41 senators... I wonder if they can even grasp the importance of this.

If I were in the White House, of course, I would go on the offensive and accuse Republicans of sabotaging the economy... But that's just me.

UPDATE: Now it's come out that just one senator can send a nomination back to the White House. If I were there, I'd resubmit Diamond's application. (thanks to commenter sraffa.)

Christy Romer to Resign?

This certainly wasn't the Fed official I wanted to resign. The word was that she wanted a larger stimulus, Larry didn't, and she felt she wasn't having enough influence...

Don't think it's official yet tho'...

UPDATE: Wow! It's official. Of course, I suspect part of this is that, given that Congress is unlikely to do more stimulus (except for tiny things...), there's just not that much the CEA can do for the economy at this point. And with Republicans perhaps taking control of the House, the situation is only fit to get worse.

The Key Problem with Ben Friedman's Thesis...

Yglesias holds up the rightwing push to repeal the 14th amendment as support for Benjamin Friedman's book "The Moral Consequences of Economic Growth". However, the key problem I had with the book has been very much revealed. You might recall that in the wake of the financial crisis, Americans elected Barack Hussein Obama, the first black man ever. They didn't go all right-wingy. Since Obama's election, however, the Tea Party has really gained momentum, so much so that my father-in-law sent me an email forward the other day alleging that Barack Hussein Obama and his sinister cronies in government are in the midst of a devious plot, involving the global-warming "hoax", in order to make them all multi-billionaires.

The key problem with Friedman's thesis is that when the economy is doing poorly, anger toward the government in power rises. If the government in power is George W. Bush, then liberals gain support and Nancy Pelosi and Barack Obama get to make policy. If you've got a liberal government in power, then they will be discredited. And if the opposition is full of conservatives, then of course they will tend to push zenephobic policies...

Same thing happened during the Great Depression. In the US, the Great Depression destroyed the conservative movement for a generation -- until war hero Ike Eisenhower led the ticket. In Germany, the Great Depression destroyed the left. Key factor was who was in power and that they did not respond effectively to the recession.

This administration has not responded effectively to the recession, and so now we're seeing their enemies emboldened.

Shocking Revelations about Alan 'Ben-you're-hitting-the-bulls-eye' Blinder

He's just tryin' to make his.

He may be a nice guy. At one point I thought highly of him. But since the crisis, that has changed. Everything of his I've seen him write since 2008 has been wildly off-base. Maybe he's spent too much time hustlin' regulators, and not enough time thinking about the economy...

Ken Rogoff, you shoulda stuck to chess...

Give this a read. Like making fun of a retarded kid, it's really too bad to criticize.

Ken says we shouldn't use so much monetary and fiscal policy to fight recessions, and that the government impeded long-run growth by interfering in the Great Depression.

Those are fightin' words to an economic historian.

What's often lost is that, in deep recessions, R&D budgets are cut. R&D budgets in Japan today are certainly much smaller than they'd have been had Japanese central bankers figured out 15 years ago that all they need to do is print money. Instead, Ken tells us, what we need is less focus on these short-term issues like recessions, and instead simplify the tax code. This will lead to faster productivity growth, says he.

I feel like I've been fianchettoed...

Fact of the Day...

Charles Plosser is from Birmingham, Alabama. Born in 1948. And he's not the only white southern male on the Fed.

I wonder how much these conservative white guys from the south fancy having a black man as President...

The Utter Uselessness of Modern Macroeconomists: Michael Woodford Edition

So, I'm trying to divine what Michael Woodford thinks about the Fed's decision, for all intents and purposes, to lower its inflation target in the wake of the largest financial crisis in post-war history, and allow long periods of high unemployment for seemingly no reason. Doesn't appear he's commented. (Let me know if you see anything!)

I see in one of his papers he writes:

We distinguish between quantitative easing in the strict sense and targeted asset purchases by a central bank, and argue that while the former is likely be ineffective at all times, the latter dimension of policy can be effective when financial markets are sufficiently disrupted.

I have a few problems with this. First is that Quantitative easing is usually defined as targeted asset purchases by a central bank, of assets other than short-term Treasuries. Second, that "quantitative easing ... "is likely be ineffective at all times". (I wish I could get away with such grammar lapses in my Abstract for papers I submit...) In any case, he's arguing that even if the Fed creates trillions of dollars out of thin air and monetizes the entire US debt, that it will have no impact on inflation, gdp, or other economic variables. However, "targeted asset purchases of non-liquid assets", such as MBS, are likely to help.

I'd say, if your model is telling you this, then you need a different model.

Nevertheless, patently ridiculous or not, this paper be gettin' published at the AEJ.

Proposal for "Getting Through" To Ben Bernanke

Although the logic for politician non-involvement in Monetary Policy is reversed in a liquidity trap, I still don't like the idea...

That said, I do think the CEA and administration should try to "work the refs" -- create momentum from top economists for more QE. Two people Larry Summers might want to have a word with are Mark Gertler and Michael Woodford, who've written such real-world-relevant papers as "Monetary policy in a world without Money", are prestigious, well-respected theoretical Monetary Economists who don't often privilege us with comments on real-world economic phenomena.

Yet, from their theoretical papes, they should be all over more QE today, and, of course, they are well-respected by Ben Bernanke.

The President's Council of Economic Advisers' Forecasts and the Memory Hole...

Remember back in the beginning of 2009, when the administration was telling us a small stimulus was sufficient? Well, part of the reason may have been the rose-tinted glasses with which the administrations' economists saw the recession. Check this CEA report from February, 2009, in which they projected that this recession would be one of the lightest and briefest in the postwar era. They projected GDP would decrease only 1.2% in 2009 (following a contraction of 6.4% in Q4 2008 and an expected 6.0% contraction in Q1 2009), making the 2009 recession the 3rd lightest of 11 post-war recessions.

I'm not sure how the deepest financial crises since the Great Depression, in which the Fed hits liquidity trap territory early on, leads any economist to think it's going to be a light, quick recession.

In any case, the latest revision was that GDP shrank 2.6%. So, what seemed at the time to be a hopelessly optimistic forecast turned out to have been a hopelessly optimistic forecast by the "best and brightest" economists around.

Hoisted from the Comments

Just heard an explanation on NPR about why deflation is a problem. The reporter said "And that's why the Fed does all they can to avoid it"

Thought you might be amused.

No, it makes me want to cry.

What's Been Keeping us out of Deflation?

With the inflation/unemployment circles posted recently on Krugman's blog and others, one thing has been clear -- the disinflation this time around was actually not that severe given the dramatic rise in unemployment.

One reason this might be the case, and this is pure speculation, is that health care is a larger fraction of the economy today, especially compared to oil, than it was in the 1970s. From the BLS, the past three months "benefits" inflation has been three times the wage inflation. And then see this -- health care costs are expected to rise 9% again next year (after being forecast to rise 9.5% this year), are basically on autopilot, and just not that responsive to anything. This is unlikely to be the whole story, but it certainly seems plausible... Any thoughts?

Woe the 14 month wait...

Compare: Charles Plosser, president of the Philadelphia Fed, said in an interview this week that “I don’t think deflation, or sustained deflation, is a real problem at this point. It is hard to imagine how you can get that when you have got a trillion dollars in excess reserves sitting in the banking system or as long as expectations of inflation are well anchored.”

To: Peter Diamond, nominated to be a Fed governor, said this month in a written response to questions from Senator Richard Shelby, that deflation is a “greater risk” than inflation.

Would have been nice to have had Diamond on the Fed 14 months ago...

UPDATE: So, from what I've read of Diamond, and his interviews, I like him, but still I think it is very much wait-and-see. The downside is that he is 70, so he's not in any position to be ensconced at the Fed for the next 35 years helping to elect Democratic Presidents and prevent stupid monetary policy like we're seeing currently (Supreme Court rules apply here...). Secondly, it's an open question whether his older mind is nimble enough to grasp that we need non-standard monetary policy now!.

In his testimony the other day, I saw this:

Diamond favors “maintenance of the current level of ease” in monetary policy, “with vigilance to circumstances that might call for a change in either direction,” according to his responses to written follow-up questions from Shelby.

Hard to interpret that, though, since I would also state support for the current policy in front of congress and then pull a 180 the second the next round of economic data come out...

Another Stimulus Idea...

A comprehensive immigration bill, we know, is not going to happen.

And more stimulus is also, we know, not going to happen.

But, one thing the Congress could do if they weren't idiots is set aside another $5 billion to beef up the fence between the US and Mexico. I know, probably a waste of money, but it would likely reduce at least some of the illegal traffic, including drugs, which come across the border but more importantly it would put Americans back to work and make Americans think that Congress is doing something about immigration... CNN ran this segment the other night making it seem like a total outrage that we don't have a massive fence across the entire border with Mexico...

Why Isn't the Fed Doing More?... someone asks...

Because they are complete fools. Dallas Fed chief Fisher's comments are only the latest data point proving there's just no there there with Fed policy...

The admin already shot itself in the face on Bernanke, but does anyone know if the Obama Administration can have embarrassments like Plosser and Fisher removed?

To Extend Bush Tax Cuts or Not...

Given that we all still expect to be at 9.0%-plus unemployment one year from now, the middle-class tax cuts are clearly still a no-brainer. What about for the rich?

Cristina Romer says no. I think this is terribly short-sighted, however. Republicans, of course, wildly support extending them. So much so that this is one form of stimulus which they won't filibuster. Hence, the Democrats could plausibly agree to a one to two year extension in return for another $200 billion in aid to states and extended unemployment benefits. Of course tax cuts for the rich are the worst form of stimulus possible, but it still is stimulus. (Except the estate tax, no reason whatsoever to extend that...)

Now, if the Republicans give nothing in return, then eff it, but we should at least try. The economy really does need to be stimulated, and now that the Fed is leaning toward doing slightly more QE means that another stimulus package would likely only make the Fed lean toward doing nothing/raising rates but not actually do it. So, we're in the sweet spot where more stimulus is warranted and can be effective.

Random Post on Blogging and Family Planning...

OK, so I think I've read Josh Marshall since 2002, roughly, and Matt Yglesias since 2002-2003.

Back in the day, I found that Josh Marshall was the gold standard for questions about the Iraq war, and about who to support in the 2004 Democratic Presidential Primary, and I read his blog first thing when I woke up every morning. (BTW, I went for Wes Clark in '04 -- who got effed by not entering Iowa, but I digress.)

In any case, I think Matt Yglesias has grown up and evolved since then. I've been impressed with how much he's learned of economics. Although I still read Josh Marshall -- and, after meeting him, am even more impressed with him as a person -- I do think he's basically missed the whole story of Obama Administration economic mismanagement and analysis of the financial crisis. Of course, he's not alone in this -- I haven't seen it suggested anywhere in the mainstream media that reappointing Ben Bernanke was a mistake, even though I feel very strongly it was catastrophic. Yglesias, on the other hand, while occasionally writing stupid things about economics, has done a really good job with it. On occasion, he's even beaten Krugman to the punch in criticizing the Fed, and often gets things better than Krugman.

Which all leads me to think -- Josh Marshall started his family a few years back. I'll imagine I'll do the same in a few years. And when I do, I just won't have the time to devote to reading and doing so many random things, and teach myself new skills, which I can now. The only way I'd have as much time to devote to these things is if I was a terrible father, which might end up being the case but won't happen for lack of time commitment. And then there's the evidence that younger minds are more malleable, and that this is a good thing. It's always a good thing to try to teach your students -- to have an open mind. I'll have to think of some good "open mind" NLP scripts to feed my students...

Peter Orzsag says small stimulus size was due to political constraints...

Here's his talk.

I disagree. I'm sure when he was in the room and Democratic Congressman who's jobs depend on having had a large stimulus were demanding a stimulus which was clearly too small it might have clearly seemed like there was "no choice". In fact, however, there are a number of things the administration could have done had they really believed the stimulus was too small. One thing the White House should have done is just to say, flat out, that they think the stimulus was too small but that they didn't think Congress would pass more. Another thing they could have done is announce a larger stimulus in the first place -- which needed no negotiations with Congress. Third, they could have done the AMT patch, which would have been done anyway, separate from the stimulus. Fourthly, they could have merely pushed a $600 billion "net stimulus" which excluded the AMT patch and the $400 billion in counteracting measures at the state and local levels.

Also, we've had a bevy of complaints, at the time and since, from Congressman such as Peter DeFazio that "Larry Summers hates infrastructure". I think there must have been people in the administration who themselves didn't want a larger stimulus, or at least, didn't realize it was something worth fighting for...

More WTF from the CBO...

Doug Henwood has a nice article showing what appears to be the CBO inserting itself into a political debate on the side of budget-cutting now. What did they do? Their budget projections assume that productivity growth in the future will be less than it has been historically, making the future budget situation look worse.

Longtime readers of this blog will remember how awful the CBOs projections were from the middle of December, 2008, when their projection was that the "worst case scenario" would result in unemployment maxing out at 8.5% in 2009, and that the "best case scenario" would see it hit 7.6% (if memory serves), a rate it hit just six weeks later. Six weeks which saw no real unemployment surprises... This extremely positive economic assessment bolstered the arguments of those who said the stimulus was too big, and then it bolstered the arguments of those, like Greg Mankiw, who pointed to the original CBO estimates as proof that the stimulus had a negative impact on growth!

To an "economist-critic" like myself, of course, the latest out of the CBO is just one more data point that helps paint a picture of a very troubled profession...

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.

Discuss.

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...)

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.

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.

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".

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.

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.

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.

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...

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...

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

Finally!

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.

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...

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?

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.

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...

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...