Our Man Larry...

I've gotten away from LS blogging, as he's done a good job of remaining in the shadows recently. Noam Scheiber talked to "a senior administration official who says that, 'The reality is that it’s not too hard to find a Wall Street analyst that says a second stimulus basically cancels itself out almost immediately because of the impact at this stage on government financing costs.' "

This makes no sense, of course, as Brad DeLong points out. but it does sound very Larry Summers-esque. $300 billion would make no difference to government financing costs, but it would boost GDP by about 3% over the next year.

Elsewhere, Matt Yglesias tries taking the piss out of Larry Summers-haters and those who say it would be nice if the administration were more liberal. Problem is, he says, is that even if you replaced Larry Summers w/ someone more liberal, they would still have to get things through Ben Nelson/Olympia Snowe/the 60th most liberal member of the Senate. And the 60th most liberal member of our Senate is likely to be a very confused individual.

This doesn't really apply to most of the criticisms I've had of Summers though. Had the administration announced a stimulus package of $975 billion to begin w/, the centrists would have cut it to $900 billion in order to flex their centrist muscles. Starting bigger would have changed the bargaining path. I'm not familiar w/ the inns and outs of the bank reform legislation, but I also suspect that much the same thing happened -- they should have had legislation to move through Congress for the day after the AIG pay scandal. They also should have moved to curb finance industry pay (something reasonable, like higher rates on huge pay packages), and had that move through the Congress the day after the pay scandal. The administration should also have gone for a second stimulus/bailout to the states after it was clear that more was needed. Although, actually, it was always clear that more was needed...

It's not that Larry Summers/the Obama Economic team lives on a different planet, but they probably don't know anyone who's actually been affected by this downturn.

Konczal on Karelis (and Bill Easterly is an Idiot)

Book review here.

I haven't read it yet, but just ordered it based on the review. As there are really a very small numbers of books or papers worth reading which can tell you something interesting about why some countries are rich and why others are poor, I look forward to the book's arrival.

I'm not going to get my hopes up, like I did when I saw this out of Bill Easterly. The title "Was the Wealth of Nations Determined in 1000 B.C.?*" and abstract sound interesting:

"We assemble a dataset on technology adoption in 1000
B.C., 0 A.D., and 1500 A.D. for the predecessors to
today’s nation states. We find that this very old history of
technology adoption is surprisingly significant for today’s
national development outcomes. Although our strongest
results are for 1500 A.D., we find that even technology as
old as 1000 BC is associated with today’s outcomes in
some plausible specifications."

This sounds plausible -- after all, Eurasia certainly led technologically in 1000AD, with Africa 2nd, the Americas 3rd, and Australasia 4th... Today, very few Australasians are even alive, native Americans are sparse in the temperate American countries, and the world is really almost completely dominated by Eurasians. To me, this confirms Diamond. Not to Easterly. He kills the latitude dummy in a growth regression by including variables which: (1) give Europe especially high marks, (2) give a 1 for the rich Neo-Europes and zero otherwise, (3) give a 1 to the poor neo-Europes. Like a complete fool, he then pronounces that: "the association of latitude and current development is not invariably causal and direct." But of course, the reason the latitude dummy is big is b/c of Europe and the Neo-Europes located far from the equator, which he coded as the rich Neo-Europes, apparently not noticing that Canada, the US, Argentina, Uruguay, South Africa, Australia, and New Zealand are all located far away from the equator.

All you need to know about the paper is in the references: Easterly has not read Crosby. He has not read Diamond 1993. You cannot do research in this field if you are ignorant of Alfred Crosby and Jared Diamond's best work. (Or rather, you can still do and publish research only b/c this field is still in the Dark Ages, but you cannot do good work.)

Karelis, don't let me down!

Gagnon's Paper

Is here and it is getting a lot of play.

I very much agree with his sentiments, especially on Japan. He writes: "The Bank of Japan should state more clearly its intention to return inflation to at least 1 percent over the next two years, purchase an additional ¥100 trillion of longer-term debt securities with an average maturity of around 7 years, and commit to a further ¥100 trillion in such purchases in 2011 if core inflation over the next 12 months remains negative."
That's a fistful of yen. Unfortunately, the Japanese Central Bank is far too conventional to do much more than ¥10 trillion. Sad.

The part that makes me upset is that I suspect the financial press in Japan, who sometimes look at academic research and talk to economists, are not getting the message from the economic community that, YES, It's totally obvious that Japan should be printing fistfuls of yen, and that Japanese monetary policy has been terribly misguided now for two decades.

I think a visitor to Chris Sims or Michael Woodford's homepage would be impressed by the sophistication of the models and the abundance of research, but are these monetary titans sophisticated enough to state what is completely obvious to laypeople about Fed or Nichigin monetary policy? That's not clear to me. And, as I've blogged about before, Blanchard simply gets Japan wrong in his undergraduate textbook.

Crazy Bunning

He chews out Bernanke here .

In very populist tones. Problem is, he is upset that Bernanke "bailed out banks," particularly AIG, and "flooded the economy with cheap money."

Suffice to say Senator Bunning is guilty of a few conceptual errors here...

"You are repeating the mistakes of Japan" Bunning says... Of course, Bunning is correct, but purely by accident. Japan should have done more QE, and Bernanke should do more QE, but that's not what Bunning was talking about... He is furious that Bernanke is "propping up the banks".

He never criticized Bernanke for projecting 9.3-9.7% unemployment and 1.4-1.7% inflation for Q4, 2010 and being perfectly OK with it.

Typical Republican nonsense. Republican Senators don't know which way is up... Totally lost in space.

Hoisted from the Comments: Commenter Gabe

Commenter Gabe disagrees w/ my take on Bernanke:

The Fed has substantially expanded its balance sheet until 12/08 though. What you're saying is that the increase from a balance sheet of ~900 billion in March 08 to over 2000 billion in 12/08 and its stayed over 2000 billion since then. If something was going to cause inflation, that should have done it. I agree that Bernanke shouldn't have tapped the brakes, but its hardly being an inflation hawk.

In a liquidity trap, even QE won't matter. If the Fed buys assets and gives banks reserves, then they need to lend out those reserves to affect monetary aggregates and the price level. If the bank just puts those reserves back at the Fed, then this becomes excess reserves and has no effect on the money supply, and no effect on prices. QE might be worth it to monetize government debt, but if the intent is to increase money supply or lending, then it won't have an effect in a liquidity trap.

Also, if you want to get rid of Bernanke, who should he be replaced by? (I stick by De Long)

Also, how many reserves would be enough? The following chart should show that the Fed has been trying:

http://research.stlouisfed.org/fred2/series/BOGAMBNS?cid=124

Sharp comments. I have a few quibbles, however. The Fed's Balance sheet did go below 2 trillion -- from about 2.35 trillion on the 12/31/2009 to about 1.8 trillion in March. That's a fairly substantial "tap on the brakes" given that the "normal" pre-crisis balance sheet contained about $800 billion in assets. It was also clearly, in my opinion, a mistake. Since March, the Fed has started its normal QE program and poured more money into MBS and agency debt, growing its total assets slowly, but has not gotten back up to its previous high. Back in February of this year, I (and many other economists) were still under the mistaken impression that the Fed was still pumping money into the system like mad -- turns out they were pumping money out of the system. It did not occur to the Fed to start QE on long-term bonds until March. That would certainly have been something I would have tried the previous fall, back in the throes of the financial crisis.

Secondly, I think the nearly $1.5 trillion Bernanke pumped into the economy did stave off the financial crisis. Until 12/31/2009, one might be able to argue that, as far as the Fed's balance sheet is concerned, Bernanke did everything right. (In actuality, I think he should have been more expansionary much earlier in 2008, once it became clear that the markets were spooked.) And perhaps his actions merely staved off deflation rather than actually ignite much inflation? Of course, it is impossible to know the counter-factual, but I can see several plausible channels by which dumping large amounts of cash into a variety of assets helps out the economy: 1) When the Fed dumps $850 billion into MBS, this does help out banks' balance sheets and profits, making them more likely to lend (and less likely to fail), 2) Lowering the yields on a variety of long-term bonds also reduces borrowing costs for the economy as a whole, although perhaps the effects are not as strong as when the Fed Funds rate gets lowered, 3) More money created, even if it just sits in banks' coffers, still should lower the value of the dollar, helping net exports (IS curve shifts right), and, as Gabe concedes, 4) there is the added benefit that QE helps the government's long-term fiscal situation, plus 5) all that extra money swishing around means higher asset prices generally, which might have a small feedback into consumer confidence.

And I'll go ahead and concede that most of these channels will not be very strong unless we start talking hundreds of billions of dollars. But we are talking in hundreds of billions... (And this is why the graph linked is misleading, since, historically, a $50 billion increase in the Monetary base is a big move -- but now it isn't.) Instead of doing $300 billion on Treasury QE over six months, they might have done $300 billion in October to December of last year, another $600 billion from Jan. to March, and, then, had we gotten labor market results similar to what we actually did get, then another $1.2 trillion from April to June, and then, had the economy continued to bleed jobs in that period (as it did), then add another $2.4 trillion through September. Had the Fed followed this strategy, I suspect we'd have turned a corner on the jobs front months ago, I suspect inflation would start to creep up, and I suspect we'd be expecting 7% unemployment sometime in 2010 rather than sometime in 2012. And, yes, I realize that Monetary Policy operates with lags -- if the Fed had expanded it's balance sheet to $4 trillion by now, and if we had enjoyed our 2nd or 3rd consecutive month of 100,000+ job growth, with inflation ticking upward, then the Fed would need to reverse course, and need to move quickly to reverse large chunks of that $4 trillion very quickly. But we are at least three months away from having that, so the Fed's balance sheet should still be expanding.

I'll concede, of course, that fiscal stimulus is a better option. There should have been more money for states, and that money should have been dispersed sooner. I'll also concede that the latest unemployment numbers make more action on QE less urgent than before, but more is still clearly needed.

As to the question of "who to replace Bernanke" -- how about Jon Corzine? One critique of academic macro people like Bernanke is that he (and they) probably know nobody personally who has lost his/her job or really been directly impacted by the increase in unemployment. It's just a statistic to them. Corzine actually did loose his job solely b/c of the crisis! On another level, I do not think it matters. Clearly the experiment with picking an academic macroeconomist did not go so well. I do not have confidence in Ben Bernanke, and I think there are a large number of people who can do better. The most important qualification are that whoever does get the job had better know how to handle the yahoos on the FOMC, like Plosser, who is truly an embarrassment. It would also be nice to have a Fed Chairman who does not see fit to reminding the Congress it has the power to repeal Social Security and Medicare.

This Post is devoted to the Idea of Seeing Ben Bernanke Spend More Time with His Family...

Nobody was happier about this week's unemployment numbers than Ben Bernanke. It will probably save him. Worse than that, thanks to the substantial unemployment adjustments for the past two months, the Fed's unemployment projections for the current quarter suddenly seem entirely reasonable, so I'll eat crow on that one.

And Paul Krugman has it right -- now if you are the Fed, you are convinced you were right and are right that the economy needs no more QE -- see, the unemployment rate is dropping! If you are in the Congress, and last week you said that there was no need for more stimulus, then again you are proved correct!

But this is wrong. For even if unemployment is only 9.1% in one year's time instead of 9.5%, that is still way too high. And even if inflation is 1.8% next year rather than 1.7%, that is still too low. And, in general, the economy needs to add 110,000+ jobs per month to keep pace with the rising population. The moment to start to lighten up on the QE is once we have done that for several months consecutively.

And now we have Bernanke saying that not only is more QE out, but that more stimulus is also a bad idea. And, further then "Bernanke reminded Congress that it has the power to repeal Social Security and Medicare." Here is more: "In testimony before the Senate Banking Committee today, where he’s seeking re-appointment as the Fed’s chairman, Bernanke called for cutbacks in Medicare and Social Security even as unemployment rises and the middle class is endangered."

This is just too much...

We have a Fed chairman committed to doing nothing to an economy with 9%+ unemployment and inflation which is lower than it need be. And a Senate which now gets to vote to confirm Bernanke, basically voting on whether this is acceptable or not.

Thorstein on Bradford DeLong's Semi-Daily Journal...

Here:

The problem is that Obama has listened too much to Larry Summers, who is a deficit hawk, and who was never really a full believer in Keynesian prescriptions... He thought things should be left more to central bankers. And so went w/ a small stimulus. Here's the thing: this might not have been so bad but for a Fed which is perfectly content with 1.4% inflation and 9.7% unemployment. And but for Macroeconomists like Alan Blinder who call this "hitting the bulls-eye".

To which I'll add -- although I think Obama's stimulus was too small, had Thorstein Veblen been President, I might have only proposed a stimulus of $925 billion or $975 billion. Our current Macro situation wouldn't be that much different. But had I been Fed Chairman, I would not have shrunk the balance sheet from January into March. I would have started buying buying long-term Treasuries in November rather than March, and I would have bought $3 trillion rather than $300 billion. I'd have printed money until it obscured the sun. I'd have pumped money into the system until... until we have actual employment growth or inflation. What is the logic of stopping when we have neither? (And for all those who are worried that once the economy does rebound, we'll have to deal with the problem of having all this excess money floating around, I say, once there is a strong recovery, that money can be taken out, and banks' reserve requirements need to be increased anyway, why not do it while there's a trillion sitting around in excess reserves anyway?)

But I digress. The main point is that Ben Bernanke is God, not Larry Summers. Had Summers done more, who can say that the yahoos at the Fed wouldn't have done even less? And when Ben "inflation-fighter-extraordinaire" Bernanke talks to Macroeconomists outside the Fed, such as Alan "Ben,-you're-hitting-nuthin'-but-bulls-eyes" Blinder, what kind of a message is he getting? Is anyone telling him he's messing up, save a few fringe bloggers like Ryan Avent? That's not clear to me.

The Fed's Economic Projections

Isn't the Fed supposed to have lots of really bright people working for it?

Then why is the Fed's latest unemployment projection (from the minute's released the other day from the meeting on 11/4) for the current quarter: 9.8 to 10.3? The "Central Tendency" which excludes the three highest and lowest projections, was 9.9 to 10.1.

Keep in mind, these are forecasts for the average of the current quarter, but still, whose forecast was 9.8%? We're at 10.2% now. We will likely be at least 10.3% unemployment tomorrow. We would therefore need job growth of at least 250,000 in December to get back to 10.1%, and probably 600,000+ to get to 9.8, or else have lots of people up and leave the labor force (which is more likely).

In other words, the Fed's unemployment projections for the current quarter (made on 11/4) are already a straight-up joke. It doesn't inspire much confidence that the Fed's unemployment projections of a 9.3-9.7% average for Q4 2010 very good either...

Would anybody like to bet, and take the Fed's unemployment number-range for the current quarter? I'll give you 5-to-1 odds...

Just when you thought Macroeconomists could not be any more worthless... They just keep going out of their way to show that they cannot even do simple math yet again. Need another reason to pile on Macroeconomists? The ECB is just as bad as the Fed.

This may be a dramatic conclusion, but to me this just symbolizes the dramatic breakdown of any coherent thought at the Fed, and the majority presence of crazies on the FOMC.

Smackdown w/ Steven Landsburg

See it all here.

Landsburg linked Cochrane's "devastating" critique of Krugman. So I asked Landsburg why he backs Cochrane on Cochrane's belief in the discredited "Treasury View".

Landsburg replied: "If you believe this [the Treasury View] is Cochrane’s view, then you cannot possibly have read the piece I linked to (see the section headed “Stimulus”). I suggest that you read it."

To which I replied:

I suggest you read this.

I’ll give the mike to John Cochrane, and let him say what he believes:

“Most fiscal stimulus arguments are based on fallacies, because they ignore three basic facts.

First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both1 . This form of “crowding out” is just accounting, and doesn’t rest on any perceptions or behavioral assumptions. ”

That is the Treasury View. John Cochrane wrote that, presumably because he believes it. You say you back John Cochrane. Krugman and DeLong attacked John Cochrane for re-inventing the Treasury View. Now is your time, defend the Treasury view. I.e., tell your readers why you believe, in Cochrane’s words, that: “Every dollar of increased government spending must correspond to one less dollar of private spending."

------------------------------------

Apparently Landsburg did not follow the Stimulus debate...

I'm kind of curious to see what he'll write. I predict he'll go crazy, and write stuff that makes no sense whatsoever... 40-60 he's too yellow to respond at all.

Update: Landsburg replied, suggesting I read Barro's Ricardian Equivalence paper, and other mumblings by Cochrane. I protest that he didn't reply to my question, and that Cochrane's other mumblings are just as crazy -- Cochrane says "the multiplier is likely less than zero". Commenter Gabe then points out that Barro's Ricardian Equivalence gives a positive multiplier in contrast to Cochrane.

Landsburg replied by cutting off the debate and refusing to let me post again. He did not reply why he supports Cochrane's belief that "the multiplier is probably less than zero" and why he told his readers to go read about Ricardian Equivalence to show why Cochrane's right when it shows the opposite.

Y tu, Bradford?

No group of economists are bigger fans of Bradford DeLong than the Economists for Firing Larry Summers (and Ben Bernanke too).

I do not understand his defense of Ben Bernanke, except that he does not want to be responsible for Bernanke's canning by the Congress.

Ben Bernanke has led the US economy to 10.2% unemployment and counting while leaving plenty of arrows in his quiver, ostensibly in case giant lizards come to invade Texas. Then he can do some real QE.

Btw, Ryan Avent has been money recently! Here's the key graf: "The Federal Open Market Committee generally expects ... the unemployment rate holding between 9.3% and 9.7% [in 2010]. ... and the FOMC believes that the unemployment rate might possibly fall as low as 6.8% by the end of 2012... Core inflation is forecast to reach no higher than 1.7%, even into 2012. But the minutes reflect no inclination to do anything more than what has already been put in motion."

At this point, the Fed looks to me like it's actively trying to screw the Democrats in the mid-terms. That's *NOT* what Bernanke's thinking is, but the effect is the same. What reason is there for the Fed to be OK w/ 9.3% unemployment while inflation is just 1.7%??? And, given that Fed has been serially overly-optimistic, a 9.3% forecast for the end of 2010 probably means 10.3%.

I think it's just become really clear that Ben Bernanke does not know which way is up. Hey hey, ho ho, Ben Bernanke has got to go.

Questions for Bernanke...

Here at the "Cunning Realist".

Here's my take on the questions:

#2 is my favorite: "2. On May 5, 2009, in front of the Joint Economic Committee, you said the following about the unemployment rate: "Currently, we don’t think it will get to 10 percent. Our current number is somewhere in the 9s" [source]. In November it hit 10.2%, and many economists predict it will go even higher. This is happening despite enormous fiscal and monetary stimulus that you previously said would help create jobs. What happened after your JEC testimony in May that caused your prediction to miss the mark?"

Bernanke has continually had overly optimistic projections for the US economy. The obvious follow-up to this question is, why, if he forecasted unemployment to be somewhere in the 9s, did he not do more Quantitative Easing? Why did he think 9% unemployment was "OK"? And given that consensus projections are for unemployment to be above 9.75% and inflation to be low at this time next year, why did the Fed just end a program to purchase $300 billion in Treasuries? Why not, instead, bump this program up to $700 billion given that the job market is still bleeding? (And, if that doesn't work, why not bump it up to $1.5 trillion?) Since it is clear the Fed Chairman has continually erred on the side of doing too little, why should the Senate not expect that Bernanke will continue to do too little?

I also liked question (1) -- the Fed did make a mistake in paying back AIG's counterparties 1 for 1. Although this was a clear mistake, at the end of the day this mistake at least did not cause unemployment to go higher or do any broader damage to the system, however, so if I had to ask Bernanke one question, it would not be this one. And most of the rest of the questions are about the past. Yes, most are important, but I would aim my questions around getting the Chairman to explain why his policy, right now, is so cautious. In not so many words, I would make it clear that he needs to start greasing the economy for the mid-terms next fall -- or else.

Paul Krugman is sometimes too good...

Here Krugman is poking fun at this truly inept article which quotes Bill Gross, bond trader, as saying '"What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”' Funny thing is, he's longer on US gov't debt than he's ever been!

Trouble w/ this is that it is winter, the job market is starving, and Ben Bernanke is leaving our stache of nuts for the spring...

The NYT story also gives more evidence of stupidity at the Fed: "The Fed, meanwhile, is already halting its efforts at tamping down long-term interest rates. Fed officials ended their $300 billion program to buy up Treasury bonds last month, and they have announced plans to stop buying mortgage-backed securities by the end of next March."

It's unfortunate that the Fed has stopped its bond purchases -- although it's clear we can't trust the gray lady. The Fed has recently been ramping up its purchases of MBS in recent weeks, and they actually just extended the MBS purchases until March from December...

Krugman is correct -- this sounds like a Judy Miller column on Iraq...

Elsewhere in the article it says: "Wall Street firms advising the Treasury recently estimated that the Fed’s purchases of Treasury bonds and mortgage-backed securities pushed down long-term interest rates by about one-half of a percentage point."

To the extent we can believe this (mostly b/c it matches my priors and not b/c I trust anything in the NYT), this just confirms the overall picture of a Fed who could be doing more but isn't.

Summers Dead Wrong on Cause of Crisis

This from Vanity Fair:

Summers has plenty of other things figured out as well, including the origins of the current financial crisis, for which he has crafted a cogent explanation worthy of his reputation as a policy wonk and his days as a college debating champion at M.I.T. “I think crises like this get made by multiple cascading misjudgments,” he explains, and then catalogues them: too much government spending, not enough private-sector saving, too much dependence on foreign debt, too much demand for “riskless” financial instruments that weren’t, in fact, riskless …

The first three of these were, at best, only tangentially related. As much as I think the Bush tax cuts were a mistake, Republican inability to balance the budget really did not have anything to do with the crisis. Ditto for Private-sector saving (even though i think saving is good, generally...) Dependence on foreign debt had nothing to do with the crisis.

Then there is this:

There were also charges of betrayal from Iris Mack, a former derivatives specialist at the Harvard Management Company (responsible for investing Harvard’s endowment) and the second black woman to receive a doctorate in applied mathematics at Harvard. Mack claims that soon after she started working at Harvard Management, in early 2002—after a stint at Enron—she became uncomfortable with the lack of understanding she thought her colleagues had with the risky derivatives they were investing in. (She was proved correct in the past fiscal year, when the endowment dropped 27.3 percent.) On May 12, 2002, she wrote an e-mail to Summers, alerting him to her concerns: “As a proud Harvard alum I am deeply troubled and surprised by what I have been exposed to thus far at HMC, and the potential consequences for my alma mater’s endowment. In addition, I strongly believe that if my fellow alum[s] knew how the endowment is being managed and the caliber of some of the portfolio managers, they probably would not give another dime to our endowment.”

She asked Summers for a meeting and that he keep the correspondence between them confidential, “especially due to th[e] fact that several individuals have been terminated from HMC when they raised concerns about such issues.” Nine days later, Mack got an e-mail from Marne Levine, Summers’s chief of staff at Harvard (and now his chief of staff at the National Economic Council), asking Mack to contact her and assuring her that the initial e-mail “remains confidential.”

But not for long. A month later, she was confronted by Jack Meyer, then head of H.M.C., who had copies of her correspondence with Summers and Levine. Meyer fired her the next day. She has since reached a confidential settlement with Harvard that she won’t discuss. But she is unequivocal about one thing. “I would say that there is 99.9999999999999999 percent probability that Summers had a hand in my departure,” she wrote me in an e-mail. (Summers replies he had nothing to do with her firing and could not, because she did not work for or report to him. “[Mack’s] allegations were the subject of thorough internal and external reviews and found to be without merit,” says a Harvard spokesman.)

I'd already heard (and posted) about this, but don't remember posting this part of the story... The rest of the Vanity Fair piece is garbage, as you would expect.

Book Review: Olivier Blanchard's Macroeconomics, 5th Edition

I'm currently the TA for a course using Olivier Blanchard's macro book. Olivier is, of course, the Chief Economist of the IMF and was formerly the head of the department of economics at MIT (Daron Acemoglu's department). While I have not read the entire book at this point in time, I will try to update this review as I read more. Here are my current thoughts about the book (which I shall update):

1) Blanchard should be ashamed at price-gouging students in this manner ($135 new). I think it says a lot about who he is as a person and scholar. To me, ripping off students is a question of character and class. Mssrs. Blanchard apparently has neither. Tells me he's just in it for himself and he doesn't care about broader issues or teaching economics. This is a rent he believes he is entitled to b/c of his department affiliation (MIT) and his role at the IMF. (Of course, this is a society-wide problem and he is not the only one guilty of over-priced textbooks. Doesn't make it right though.)

2) The book is filled to the brim with typos. This tells us he didn't think carefully about the book or its contents. For example, check out the blue box on p. 102: "Instead, the tax cuts were permanent..." two sentences later begins again "Instead, the tax cuts were permanent..." OK, Olivier, we got it the first time. I've noticed several other obvious typos of this sort even though I'll confess I have not read that much of the book yet.

3) In Chapter 5 on the IS-LM, I think it was a questionable idea to detach the IS-LM model from the entire historical discussion of the Great Depression which led to the theory. He should have shown that, during the Great Depression, when the US found itself with close to zero nominal rates, Hoover decided to increase taxes in order to balance the budget, shifting the IS curve left and worsening the depression for no good reason. (Instead, Blanchard just leaves students with the one example that increasing taxes leads to lower income... In normal times, increasing taxes is counteracted by the Fed cutting rates, having no impact on income but reducing the long-term budget... This leaves students with the wrong impression.) Hoover later recanted of course, saying he should never have raised taxes nor let the economy burn. So the lesson is clear, and it is a lesson every student of economics should know -- why skip it? Given that 95% of Republicans recently voted for a balanced budget in a liquidity trap, skipping this history lesson is not inconsequential...

4) Yes, yes, I know he does go on to discuss the Great Depression and liquidity traps generally later in the book. I think it is really worth noting that he does an exceedingly poor job both with the Great Depression and in dealing with Japan. My problems with this section are:

i) the statement on p. 477 that "There is clearly nothing monetary policy can do in this case [i.e., a liquidity trap] to raise output..." This is wrong -- printing money to retire debt can at least reduce the price of a currency, increasing net exports. In addition, there is more than one interest rate in an economy -- the Fed can always buy long-term bonds. These are fairly fundamental, enormous mistakes which happen to be consequential at present. That this guy is in a leading role at the IMF is not a good thing for the world economy...

ii) His explanation of why deflation stopped during the Great Depression is not quite satisfactory. He lists three things: a) the NIRA, b) output growth, and c) perception of "regime change". To his credit, in (c) he goes on to mention Roosevelt's decision to leave the gold standard, but he did not mention that this gave room for the Fed to cut interest rates w/out having to worry about defending an over-valued peg. Hence, it was really Hoover's policy to stay on the gold standard which led to high interest rates... He also should have at least mentioned how misguided the economic ideology which ruled during the Great Depression, of how Hoover had foolishly thought that the budget must be balanced, and the when Roosevelt came into office, he at least ran some deficits and did increase spending. (Yes, these spending increases were only a small part of the recovery, but they were part of the story.) He needs to add that even Roosevelt's Treasury secretary believed in the preposterous idea that budgets should be balanced in a recession... As far as I know, Blanchard nowhere mentions the role of ideology. Lastly, he needs to talk about Roosevelt's bank holiday and the FDIC's role in restoring confidence. Stopping the bank runs was a big factor in stopping deflation -- I don't know how Blanchard doesn't know this. Lastly, the NIRA, by itself, likely would have done nothing, and b) was likely caused by ending deflation as much as it was the other way around. And I have yet to see Blanchard mention that, in the end, it was large increases in Government spending which ended the GD once and for all -- WWII. All in all, Blanchard's discussion of the Great Depression leaves much to be desired.

iii) As bad as his history-telling on the GD is, his section on japan may be worse. His general conclusion was that Quantitative Easing does nothing, but that having an inflation target is what helped Japan in the early 2000s. So, basically, imagine you've got a fat, lazy friend who wants to be thin. If your friend declares to you that he's going to lose 50 pounds, but doesn't do anything to change his eating habits or start working out, why should you believe him? Or, in other words, when the Japanese Central bank announced that it was "committed" to creating inflation, without actually, you know, doing anything to create inflation, why would anyone believe it? If they were rational agents, of course, they wouldn't -- Japan has had deflation every year since 1994, and still has deflation. Blanchard wrote, excitedly, that since the BoJ's announcement in 2003 "Although the current inflation rate is still negative, inflation is now expected to become positive in the future, and the long-term interest rate has fallen." (p. 489) Wow was Olivier Blanchard wrong about inflation in Japan!!! (It's hard to imagine how anyone could be more wrong about anything, no?) At the same time, he was apparently ignorant of two other events in the 2000s -- Japan's flirtation with Quantitative easing -- it bought $300 billion of it's own debt, and then, after exports increased, ending its recession briefly, it was afraid of "hyperinflation" so it sold its debt back, resulting in more deflation and recession.

I just find it really inexcusable that a tenured Macroeconomist, anywhere, much less at MIT can get both Japan and the Great Depression so wrong. It's as if Blanchard literally can't be bothered to provide the minimal amount of facts for students to form any meaningful lessons. And it's hard not to come to the conclusion that the reason is that Blanchard himself has taken no meaningful lessons from either Japan or the Great Depression. And you know what they say about societies who don't know their history...

In conclusion, this book is not careful enough to assign to undergraduates, and it is certainly not insightful enough to justify the price. It is the latest chapter on the Dark Ages of Macro...


UPDATE: I just took a look at the section on economic growth, and it is just horrible. Awful. This guy has no business writing a textbook. First, on page 213, he writes: "From about 1500 to 1700, growth of output per person ... was ... around .1% per year." But he must have gotten this from the data Maddison made up, b/c, due to the Black Death, there was a dramatic drop in living standards in Europe over this time period. 1500 was a plague-induced golden age. On page 214 he writes "For much of the first millennium, and until the fifteenth century, China probably had the world's highest level of output per person." No, no, no, no, no. During those centuries, China was likely the most technologically advanced. In a malthusian world, this says nothing about income per person. The highest incomes per person would certainly have been hunters-n-gatherers. This is just entirely wrong-headed. Blanchard simply does not know anything about economic history.

Also, in the section on wage inequality, he basically just floats two theories: Increases in international trade, and skill-biased technological change. Unfortunately, not all rich countries which have traded more have registered increases in inequality since 1980, so neither of these theories match the bare minimum a real scholar might require for a theory to be successful. For example, Japan and Europe other than the UK also have experienced much more trade since 1980, but no change in inequality. Thus the theories Blanchard suggests can be safely discarded.

Newsflash: Posner Gets Japan Wrong

This post was off-base, in a number of respects.

First, Posner wrote: "Japan spent the 1990s unsuccessfully trying to recover from a collapse of the Japanese banking industry... despite aggressive monetary and fiscal policies."

Except the Japanese central bank has done little more than twiddle its thumbs for the last two decades... Yes, they did a grand total of $300 billion in Quantitative easing, then when things got slightly better, they rolled it all back. More deflation and recession promptly ensued. This is what Posner termed "aggressive monetary policy" -- which renders the term meaningless. (And, despite the large deficits, "aggressive fiscal policy" is also quite contentious.)

Posner gets into trouble again on sentence #2 when he writes: "As a result of those policies, Japanese national debt soared..." But, of course, with true QE, the BoJ would have just retired massive amounts of debt for good.

The obvious way out for Japan is simply to monetize large swaths of its debt. This isn't just killing two birds w/ one stone, it'd be more like killing a whole flock of geese with one stone. Let's think about it, printing money would 1) increase inflation expectations, thus reducing the real interest rate, 2) weaken the yen, 3) improve financial companies balance sheets, who hold assets in $ but liabilities in yen, 4) improve japan's net exports, 5) reduce the amount of future debt which Japan needs to repay.

Why it does not is that peculiar madness, and not reason, that rules the minds of conservative men.

The Dark Ages of Macro Engulf Princeton and Harvard

I respect Alan Blinder a lot less after this: Key graph is "But the Fed deserves extremely high marks for its work since then. It has hit the bull's-eye regularly under very trying circumstances."

This recession continues b/c the Fed has been doing little more than twiddling its thumbs since 12/31/2008, shrinking its balance sheet over that time. As Free Exchange points out, 10% unemployment and counting is not "hitting the bulls-eye", it's more like not hitting the broad-side of a barn. Blinder doesn't like the legislation. Fine. But to argue against it by saying that the Fed is making the right calls when the Fed clearly is not making the right calls is probably not going to convince a whole lot of people.

Robert Waldman writes that the Fed has been "pedal to the metal". But how is the Fed's contraction of the money supply over the past year "pedal to the metal?" This is a Fed that is habitually taking its foot off the gas (and tapping on the breaks), and has continually erred, over the past 20 months, on the side of doing too little.

Brad DeLong, Robert Waldman, and others are of the opinion that "the Fed can do nothing" given a Fed Funds rate near zero. Yet, there is surprisingly little logic or evidence that the Fed is now powerless. Yes, the Fed doesn't have as much power as it normally does, but if the Fed prints money, and buys long-term bonds, why wouldn't this: (a) increase the price, and lower the yield of long-term bonds, lowering borrowing costs generally, and (b) with more dollars in the economy (or perhaps just in Excess Reserves), reduce the value of the US Dollar, boosting net exports, or (c) when the Fed drops $80 billion plus of cash into the MBS market, as it did the week before last, this seems to buoy asset prices generally... For the life of me I can't imagine how at least (a) can't be true, and (b) and (c) must be true given enough billions are pumped into the market...

The picture we are left with is a Fed Chairman who is simply incompetent, and deserves to be audited. When it messes up, it's going to take some heat from the Congress. This isn't a 1982 style recession, when Volcker was doing the right thing...

Ben Bernanke Should Be Drawn and Quartered. And then hanged...

I awoke this morning with a pounding headache... And resolved it's time to start blogging again.

Here we are, in the 20-something odd month of labor market bleeding, and still the Fed's mighty printing presses are largely sitting idle. And despite the fact that textbook theory says you can print your way out of a liquidity trap, and that, in the situation we are in, the Fed should be rapidly expanding its balance sheet, the Fed has moved slowly and cautiously, consistently erring on the side of doing too little. Yes, the Fed's Balance sheet is now the biggest since last December -- but, wait, why did the Fed's Balance sheet ever shrink exactly? Why didn't the Fed continuously ramp up the balance sheet until we had sustained employment increases? (Or at least until we stopped the bleeding?) That's b/c Ben Bernanke patted himself on the back last February, and started shrinking the Fed's assets. This set off another sell-off on Wall Street, causing Bernanke to reverse course. Things got a touch better, so Bernanke, having not learned any lessons from Feb-March, took his foot off the pedal again, triggering more bad news on Wall Street and in the labor market in June. Since then, he's slowly increased the Fed's Balance Sheet, but here we are, 21 months into the recession, and the economy coughed up 200,000 jobs last month and the Fed has, on net, tightened in the past year. This is really incredible.

A thought: The Dow has continued to track what's going on with the Fed's balance sheet. When the WSJ first wrote an article back in May/June pointing this out, I thought it was a fluke/anomaly, and, after all, correlation isn't causality. But the fluke has continued... It still sounds nuts to me, and I'd like to think it *must* be wrong that when the Fed buys assets, the stock market rises generally, but the correlation seems too good to just dismiss this... On the other hand, the Fed now has $847 billion in MBS (up $80 billion in one week!), so I guess it's not so crazy to think this much buying would effect asset prices generally...

Another random thought: What do our nation's economists do? It's been clear for at least six months now that the Fed has been foolishly bullish on the economy, and foolishly cautious in pumping money into the economy. How many voices within the profession are pointing this out? Very few. (Tim Duy and Scott Sumner deserve credit...) Part of this is that some economists do not think it is helpful to get the Congress riled up over monetary policy (perhaps this is Krugman & DeLong's view), but I think the Fed needs to feel some heat from the profession. I very much doubt it is hearing nearly enough, if any -- even behind the scenes -- and certainly not the type of pointed criticism it needs. Bernanke needs, in short, a good smack across the face to be jolted out of his inaction. It could take a generation for unemployment to get back down to 4% (where it was in 2007), all because Ben Bernanke has been too cautious, worried about some nonexistent hyperinflation around the corner. A generation of higher joblessness is a stiff price for society to pay for one man's shortcomings.

In any case, all indications are that this is a serially incompetent Fed. Despite the good the Fed did last week, we can expect Bernanke to take his foot off of the pedal again next week (or next month), needlessly prolonging a recession which should have ended half a year ago.

Cheers for Chris Dodd : "It's not necessarily a foregone conclusion that Ben Bernanke will be confirmed."

In the immortal words of JMK, I say cut this "blind and deaf Don Quijote" loose. Let him join the millions unemployed whose fate he sealed...

Economists for Firing Larry Summers Learns Wash U.'s David K. Levine a lesson...

First, my apologies for not posting recently -- I got hit hard by the summer conference season, and journal submissions. I'm happy to report everything is going great research-wise!

In response to Paul Krugman, David K. Levin writes that "Here we are, the recession is over and we've spent 10% of the [stimulus] money..."

I then posted, in the comments:

Dear David Levine,

I'm just curious where you got the 10% figure from. The initial CBO estimate is that $185 billion will have been spent by the end of September, 2009, that's 24% of the total outlays. Even if it had only spent $100 billion (which is counterfactual), that is still more than 10%. In addition, the states' used knowledge that more stimulus was on the way next year when they set their budgets earlier this year -- so without the stimulus, states would have cut back more than they did.

Also, when people judge whether "the stimulus" worked, they need to look at the net stimulus. Since states and local governments have made roughly $100 billion in cuts for fiscal year 2009, the "net" government stimulus was probably less than $100 billion.

This means, of course, that what you and your comrades argued and are arguing for is for governments to suddenly cut way back on spending at the first sign of a recession. The way your write suggests you are not privy to what's going on at the state and local level.

Very respectfully submitted, Thorstein Veblen

Of course, I should also have mentioned that we're not 100% out of the woods yet. That unemployment is still increasing each month, and that unemployment 12 months from now, when the net stimulus will be done, is still expected to be above 9%, so that none of the stimulus will have been spent in anything approximating full employment.

In any case, David K. Levin responds:

I think 10% is a month out of date. http://projects.propublica.org/tables/stimulus-spending-progress reports $98 billion spent out of $792 billion which is 12.4%. It is certainly possible that there is some additional spending in anticipation of stimulus money coming in. It's also true that a lot of stimulus money is being spent on things that would have been done anyway, which in turn might create other spending that wouldn't have taken place without the stimulus. The key point is that even $200 billion in a roughly $14 trillion economy isn't such a big deal. It makes sense for government to do things it would have done anyway earlier to take advantage of the fact that many resources are unemployed and cheap right now. But if things have turned around - and all indications are that they have - why do we want to incur another $600 billion of debt unless we are willing to pay for it? That is, why do it outside the usual budgetary process? If we want to pay for a green power grid, and it would be more cost-effective to start sooner rather than later - then say so, don't call it a "stimulus."

Some of the stimulus spending makes sense; much does not. We are saving a small number of jobs at vast public expense - $100,000s of dollars per job - and we will have to pay it back later. There are better ways to help people in need.

Trouble is, you go to the link and it shows $98 billion spent plus $63 billion in tax cuts, which Professor Levine apparently did not see. That's more than 20% of the stimulus, and it's likely not updated to-the-minute. It's also from an anti-stimulus source, so I doubt it's going to go out of its way to make the stimulus look better than it is. I responded, but it hasn't gone thru the Huffpo's filter yet. I'll post it when it (if it?) does. I might have been too condescending, which was unnecessary, and in which case I apologize to professor Levine. At the same time, these are basic, fundamental mistakes he's making. And he's a well-paid, tenured economist in a fairly prestigious department. He should be competent enough to look up basic economic statistics, especially after being alerted to his initial mistake.

In any case, I see that Professor Levin is an MIT grad. Remember what I've said about Harvard and MIT economists . Should be no surprise that they cannot even do simple math.

Update: OK, my post went through, here it is:

Not so fast, shooter.

Your link (written by folks obviously hostile to the stimulus) says they've spent $98 billion (out of about $500 billion), plus they've issued $63 billion in tax cuts. (And, btw, I spent my $400 stimulus check... I kind of doubt I'm the only one.) That's more than 20%, and that's probably not updated to the minute. You didn't see that, not because your stupid (I think you're a bright guy!), but because you've made up your mind (and announced it!) that you are against the stimulus, and so you can only see things which confirm your biases.

By the way, in the 2nd quarter, GDP was down 1%. Federal spending was up 11%. Even w/ no multiplier, why shouldn't we think this would have an effect? With interest rates pinned at zero?

California is paying people with IOUs. Pennsylvania didn't pay its workers in July. Florida raised taxes on retirement homes. New York City raised fares for disabled people. Sacramento laid off teachers. Public employees everywhere are taking a haircut. State shortfalls alone (not counting local, which are also substantial), are $170 billion for FY2010. Yes, this means that the net fiscal stimulus is quite small. But it also means you are pushing for far more drastic spending cuts and tax increases in a recession.

That's nuts.

Summers on Meet the Press

I had been busy, and missed this, but this is Summers more or less at his best.

Check it out.

He was far from perfect, but I have to give him credit -- he did a good thing. We need him on TV more. I thought he should have focused more on the human aspects of why we need health care reform rather than arguing that slowing the growing costs of health care should increase competitiveness and talking about how Obama insists on doing health care reform in a balanced budget way, but it's larry summers we're talking about. And part of the reason I believe he can be so effective in this capacity is that, in fact, he thinks like a Republican. Republicans don't care if some poor person will get health care under Obamacare, but if businesses can cut costs and gov't can balance its budget, then! it's a winner.

I still need to see more performances like this (or better) before I'll change the blog title, however.

Thought Control in China

Chris Blattman offers his reflections on China, noting how remarkable it is that even well-educated Chinese do not think democracy would be good for China at present.

One small critique: his post was culturally very american. He takes it as self-evident that democracy is better than the alternative. He faults his hosts for not noticing that democracy works perfectly well in other large, diverse countries such as India, Indonesia, or Brazil. Here's the problem with that argument though: Chinese economic policy is better than Indian, Indonesian, or Brazilian economic policy. For that matter, it's better than America's economic policy in a wide variety of respects -- it's trying to reinstate universal health care, and it didn't have to have a bunch of halfwits in the Congress to sign off on it to get it. And its fiscal stimulus was much larger and quicker than ours, preventing a recession. And China has been able to pull way ahead of India despite having started out way behind after Mao's craziness through the 70s, which held China back for so long.

Here's one concrete policy where China leads India: throughout China, the government forces the students to learn in, and speak in Mandarin in schools. China has (had!) every bit of the linguistic diversity of India, but Democratic India will never vote to banish any of its regional languages. From a cultural point of view, of course, it's quite sad to see so many languages go by the wayside in China. I can't see why this isn't really smart economic policy, however... I'd say China's One-Child policy is another example of an absolutely brilliant development policy that could never have passed in a democracy. And one (fairly large) reason why India and Bangladesh are so poor today has to do with their (failed) population policies, which a smart dictator would simply not have allowed. Another area where China leads India, thanks to its not having democracy, is in where "direct" trains stop. In India, the "direct" trains between large cities stop in all kinds of small towns in between, owing to politics. My sense was that China was much better...

The problem with not having democracy happens if (when?) China gets a bad leader, like Mao. But China's leaders today look, to me, more like the beneficent dictator type.

And so I suspect that Chris Blattman failed to convince his hosts that China needs democracy...

Krugman Defends Summers...

I never thought I'd see the day...

I take this to mean Krugman backs Summers for Fed Chair/is trying to get in good with the White House...

Annoyed with the way Bernanke injected himself into the health care debate, by warning about long-term fiscal deficits (while simultaneously being a bit too slow on the QE, which would also help alleviate long-term debt), I'm also starting to come around to the idea of Summers at Fed. Not in an ideal world, of course, (and he wouldn't be my top pick) but it at least would get him out of the White House. The question is: Where would he do the least amount of damage?

And, although here at 'Economists for Firing Larry Summers', we do love Summers' infamous smackdown of the worthless RBC model, the critique (which Krugman links), was not quite 100% spot on. I'd post more, but, alas, the summer conference season is upon us, and it's time to work on those journal pubs...