What's the Fed Thinking?

Via Ryan Avent, here is Ezra Klein.

The Federal Reserve on Monday proposed allowing banks to set up the equivalent of certificates of deposit at the central bank, a move that would help the Fed mop up money pumped into the economy and prevent inflation from taking off later.

Under the proposal, the Fed would offer "term deposits" that would pay interest. Doing so would provide banks with another incentive to park their money at the Fed, rather than having it flow back into the economy.

The proposal comes as no surprise. Federal Reserve Chairman Ben S. Bernanke and other Fed officials have repeatedly said the creation of "term deposits" -- essentially the equivalent of CDs for banks -- would be one of several tools the Fed could use to drain money from the economy when the time is right.

Not a good sign. On the other hand, at least Summers has Fannie and Freddie continuing to pump mo' money into the economy...

Hunt on Summers

His heart is in the right place (attacking administration economists), but his points are mostly all wrong. There is this gem, however:

“If you came up with 10 words to describe Larry, coordination and collaboration would not be two,” says one person requesting anonymity who has worked with Summers extensively and admires his intellectual force.

What I didn't like about the article is Hunt's assertion that Summer's isn't good at public communication. As I've mentioned, Summers is actually great to have on TV b/c he's relatively quick-witted, and is an old, white alpha-male who looks and talks like a conservative. Hence, he is likely to be popular with other middle-aged white males -- a demographic which Democrats very much need to appeal to. He's correct that Geithner isn't great on TV, at least the times I've seen him. Geithner is too obviously beta male -- he talks too fast, makes nervous movements, looks nervous, etc...

What Obama should have done is made Larry Summers the CEA Chair, only not listen to him much (like he is w/ C. Romer), but have Stiglitz working as a top behind-the-scenes adviser as someone who makes policy but doesn't have a fancy job title or appear on Sunday talk shows.

What's also annoying about the Hunt piece is that he cannot correctly identify any of the admins economic blunders:

"The vaunted economic team is faulted for poor coordination, drawing even the president’s ire, and an inability to convey an overarching policy."

As Brad DeLong points out, Hunt doesn't really offer any evidence of this.

The administration's three main economic policy errors are: 1) Pushing a stimulus which was too small, 2) Re-appointing Ben Bernanke, 3) being too soft on the banks/softpedaling financial regs/not doing something more comprehensive on executive/financial industry pay while it would have been easy to do so.

Brad also mentions Obama has yet to make appointments for two vacant Fed governorships... that's really dropping the ball given how critical it is for the Democratic Party that we not have unemployment above 9% next November... It would be nice to see someone like Joe Gagnon in there! I actually suspect that Bernanke is likely to be quite impressionable, and that if two solid, strong-minded economists were appointed who pushed for more QE, Bernanke might well consider it.

Debate on Anonymity...

I'm called a "marixist".

This is apropos of mainstream economists -- if someone is to the left of Larry Summers, they must be "Marxist". Completely does not compute for them how anyone could be so crazy...

My sense is that if one writes a conservative or mainstream blog, blogging could be a really advantageous asset on the job market and I think it should be. As in all things, however, there is a payoff to hitting the cultural median sweetspot. That's just not going to happen here. I'm perfectly aware I'm only going to ruffle feathers by saying what I actually think in front of typical economists... If my actual thoughts were conservative, this wouldn't be a problem.

Summers on the Wonders of the American Financial System

Via Krugman:

Let me quote from a speech that Lawrence Summers, then deputy Treasury secretary (and now the Obama administration’s top economist), gave in 1999. “If you ask why the American financial system succeeds,” he said, “at least my reading of the history would be that there is no innovation more important than that of generally accepted accounting principles: it means that every investor gets to see information presented on a comparable basis; that there is discipline on company managements in the way they report and monitor their activities.” And he went on to declare that there is “an ongoing process that really is what makes our capital market work and work as stably as it does.”

So here’s what Mr. Summers — and, to be fair, just about everyone in a policy-making position at the time — believed in 1999: America has honest corporate accounting; this lets investors make good decisions, and also forces management to behave responsibly; and the result is a stable, well-functioning financial system.

Reminds me of when he arrogantly told a Korean envoy asking for help in getting American bank to roll over their short-term loans to Korea during the Asian Financial Crisis that "In America, we don't tell our banks what to do."

UPDATE: A commenter writes: "In America, banks tell the government what to do!"

Grad Econ Syllabi

Hoisted from the comments:

I guess you would categorize me as a market fundamentalist. So if you were designing a course for grad econ, what would you put on the syllabus to counter the priors of the market fundamentalists such as myself?

The goal of the first year in Econ PhDs is to train students to "solve mathematical models". My revolutionary idea is to shift the focus to "learning about economics". Mathematical models should be included only to the extent that they inform about economics -- not just taught for their own sake. And there is far too little reading and too little writing. And waaay too little big-idea readings. So the first thing is that I would make my students read and write about "big-idea" readings. What you assign depends on which course you were teaching. My opinion is that the Micro sequence contained far too few insights from psychology/economic psychology/behavioral economics/anthropology. Grad Micro should be much more like taking a Grad Psychology course than it is, and should also be much more real-world policy oriented. (As it is, it develops the same skills one would acquire taking a Math Department Analysis course -- unfortunately these skills alone cannot make one a good economist)... I would probably assign books such as "Influence" and other psych books to round out the more purely econ-related materials, but I'd have to think more carefully about what I'd put on the syllabus since Micro isn't my field...

For first semester Grad Macro, which usually encompasses Growth, I would include Economic History/big picture development stuff. I would assign Landes. Perhaps three of Diamond's books. Kamarck. Clark. Crosby. Blustein. Every phd should have to wrestle with Stiglitz 'globalization and its discontents', whether you like it or not. Sachs' development papers get high billing. I would include a bit on the history of economic thought, and especially much more on the long history of laissez faire ideology, perhaps including the adoption of laissez faire policies during the Irish potato famine -- including something like Thomas Gallagher's "Paddy's Lament", and include a reading on the repeal of the reform of the Poor Laws in 19th century britain, which was influenced by Malthusian thought... I would also do short features on critiques of mainstream economics, such as those penned by Krugman, the Larry Summers' smackdown of RBC (and his Bernanke smackdown), and also include a short bit on the Anthropological critique of mainstream economics. I also think it's a complete mistake that the Great Depression is never mentioned, even in passing, in the core training of economists. I would probably put this stuff in the 2nd semester Macro/Money course, and include readings by Friedman, Temin, etc., and Minsky should enter the conversation at some point... Any honest conservative economist would have to admit that market fundamentalism was the chief reason why the Great Crash of 1929 turned into the Great Depression.

This post is not complete in any way, and I'm leaving dozens of great readings out, but basically, the goal should be to train independent thinkers who can become effective policymakers, not proof-memorizers and fast-algebra do-ers.

UPDATE: It goes without saying that all economists should have read Thorstein Veblen, both his historical and modern day stuff (hat tip to commenter Jonathan)... I find it more than a bit strange that Veblen's behavioral insights are not incorporated into the core training of economists at all. Here is Thorstein Veblen in the QJE (1898):

M.G. de Lapouge recently said, "Anthropology is destined to revolutionise the political and the social sciences as radically as bacteriology has revolutionised the science of medicine."(*1) Nope, hasn't happened yet.

And reading Veblen is always a good way to increase one's vocabulary...

My Predictions from February

I wrote this back on February 18th:

"the Fed’s Open Market Committee said it expected that the economy would contract by 0.5 percent to 1.3 percent this year, that unemployment would rise to 8.5 to 8.8 percent and that inflation would remain under greater pressure."

Those numbers are, of course, pure fantasy. I'll bet anyone the economy will contract by more than 1.3 percent, and that the unemployment rate will be higher than 8.8%. I'd be willing to give out 10:1 odds unemployment is higher than 8.5% at the end of the year... I guess the Fed can't say things are going to fall off a cliff, but it also loses credibility...

The 1.3 percent GDP contraction number, in retrospect, looks about right while the Fed was clearly way off on unemployment. The question I have is why the Fed, after getting worse unemployment numbers than it had ever imagined, did not change course and provide more really large stimuli...

The Case For the Millionaires Surtax

Greg Mankiw links a former student courageously trying to protect the rights of Millionares not to pay more taxes here.

Here's the thing -- there are no reputable studies on the elasticity of the effect of tax changes on total taxes collected, and there's no logical reason that that number should necessarily, a priori, be less than one.

Here's why: in 2007, there were 495,000 tax returns filed for millionaires. That means a significant fraction were corporate CEOs, CFOs, finance people, and professional athletes/best-selling textbook authors/TV celebs.

Peyton Manning makes about $30 million a year -- let's explore his potential behavioral responses to changes in taxes. Let's raise Peyton's taxes by 10%. Under the logic of Alan Liard, Greg Mankiw's student, and under the logic that all economists know to be the truth, people respond to incentives. Peyton Manning is a person, so he responds to this tax hike by working 6% less, and decides now he's going to sit for the Colts playoff games since he makes less money per game, and he enjoys watching Tom Brady play in the playoffs more than being there himself. Doesn't really sound likely, does it?

Of course, Peyton Manning is going to play 16 NFL games and the playoffs even if you raise his taxes considerably. The same is true of a wide variety of other professions -- corporate execs usually have two choices, they can choose to work or not work -- there are no part-time CFO jobs, and it's probably tough to be a "part-time" hedge-fund manager as well... So, let's say Greg the textbook publisher or Chuck the hedge-fund manager decides, due to higher taxes, that they are just going to retire. In that case, the government loses 100% of the taxes Chuck or Greg would have paid! The multiplier is -10!!!

Except, according to logic which is totally obvious to a pre-schooler, if Greg the textbook author doesn't sell textbooks, then Thorstein the textbook publisher will. If Peyton the quarterback doesn't play in the playoffs or appear in Gatorade commercials, then Tom the quarterback will. If the CEO of Anthem, who routinely makes $40 million, quits due to high taxes, Anthem will pay the next CEO extravagantly. If Chuck the hedgefund manager doesn't manage Peyton's money, then Emilio the hedgefund manager will manage Tom's money...

So, in this case, microeconomists might derive an elasticity of -1 (a 1 percentage increase in the tax rate reduces tax collections by 1% if 10% of the rich decide not to work at all), while the true Macro elasticity would be closer to 1.

Note that this logic does not apply to everyone, but it is likely to apply to the vast majority of those who make more than 1 million dollars per year, and Greg Mankiw's students are completely oblivious to this kind of perfectly obvious logic...

Of course, another thing higher taxes might change is how much someone might try to cheat in order not to pay taxes -- well, if this is the case, then what we really need is to beef up the IRS.

The third thing it also might change is the pay that CEOs get. For example, if the top tax bracket were 99%, for all income over $5 million, tax opponents always describe this case as having the effect that people will just stop working after they get to $5 million. That's just not an option for the likes of Peyton Manning, however. What Peyton Manning (or any corporate CEO in the same position) would likely do is settle for just $5 million a year, since all income after that goes to the state. Then, once you get a Republican in office, and they cut that 99% top bracket from $5 million-plus to $25 million plus, Peyton Manning will renegotiate his salary up to $25 million, even though he's still playing 16 NFL games a year...

So, in this case, tax rates down implies total taxes collected from Peyton Manning up but total "production" from Peyton unchanged, but worsening inequality for the economy and less taxes paid for someone else. So, we'd need to look at whether the consumption spending of people like Tiger Woods, CEOs with their corporate jets, and investment bankers is better for long-run economic growth than the spending of the poor, who spend a large chunk of their disposable income on things such as education and health care...

This is essentially what has happened in the US, and that is why you shouldn't believe it when economists tell you we shouldn't tax millionaires.

But then, you might object, *nobody* would have an incentive to become CEO if their salaries are capped around $1 million (if I was designing a tax system, I would probably not go over 50% on taxes before $3-4 million, but I would make Peyton Manning's marginal rate closer to 70%...)

Well, I once took a poll of the students in my TA section. I asked them who they would rather date -- someone w/ a bachelor's degree who works 40 hours/week, makes $40,000 per year and pays no taxes, or someone w/ an MBA who makes $80,000, works 80 hours/week, and pays $30,000 in taxes.

Most of the girls said they'd go for the person w/ the MBA, even though, per hour, the 40 hours/week job would be more, b/c the MBA has a prestigious graduate degree, is ambitious, and makes a whopping $10,000 more overall. (I had them assume that the above were peak salaries...) I also asked them if they would take a promotion from the $40,000 job to the $80,000 job, even though it's much more work, and, after tax, a pay cut per hour, and again, most wanted to go for the higher-priced job.

The study I'd really like to see is if, since the early 1980s, as wages on Wall Street have gotten out of control, what has happened to the average age of retirement at firms such as Goldman Sachs. "Standard theory" of course does not even predict whether the income or substitution effect dominates, but I suspect that there are quite a few I-bankers on Wall Street who do not exactly love their jobs or working 100 hours a week, and will just retire once they've put away $10 million in the bank. Tax them more and that just delays retirement. And to the extent higher taxes preclude the possibility of putting away $10 million for your average I-banker and talent shifts out of finance (or NFL quarterbacking), I fail to see how this is such a bad thing for society...

Put another way, suppose the CEO of Anthem made $4 million rather than $40 million due to high tax rates on multi-million dollar incomes (which we do not currently have). While in the micro context, this would greatly reduce the government's revenue, in this case, Anthem would have higher profits, or could afford to pay it's other workers more, could cut prices to gain more market share, or might even be able to deny fewer claims. In other words, it wouldn't make the whole pie smaller, it would just make it more equally distributed. And, to the extent that the Anthem CEO no longer flies around in a private Jet, owns 6 houses, and drinks $1000 bottles of wine, redistributive taxes would quite likely make the pie bigger...

UPDATE: An email and commenter pointed out that the question I asked the students in my class was reinforcing cultural norms and stereotypes and came off as sexist. They are correct and I apologize. I had not properly edited my own post however -- when I framed the question in class, I did it in a much, much more pc way -- asking everyone how much each individual would want to make/work, and also asked the question about the spouse in a completely gender-neutral way, and also asked a variety of other questions, with all questions asked to both guys and girls (I edited my post to reflect this). The guys tended to prefer spouses who worked and made less. The girls also tended to want to make and work less -- confirming what microeconomists have already found about how the female labor supply is more sensitive to marginal tax rates than it is for men. And yes, these are due to sexist cultural norms.

Answering the Comments

In response to my post criticizing Romer's take on why Africa is poor below, commenter "Anonymous" writes:

Why couldn't they just buy agriculture on the world market and produce something else? A little comparative advantage. The reason is that Romer is right, they lack the necessary institutions to make use of all the first worlds technological innovations.

The legal institutions and cultural norms of the third world are what hold them down. Not agricultural tech and not their geography.

I was a bit flippant in my response -- but the main point is that if you go to really poor countries today, it is impossible not to notice obvious low human capital deficiencies in the populace, such as those stemming from poor nutrition. If you didn't have enough to eat growing up, your parents also probably did not have the resources to give you a proper education, and you are not likely to be as productive, even working on an assembly line, as someone from a rich country who always had enough to eat and has had enough schooling to at least be able to read, write, and do simple arithmetic.

The point is you need an agricultural revolution first. OK, Britain didn't have that before the IR, but Britain did have really high death rates and low birth rates, and later, access to American grain, which all had the same effect as an Agricultural Revolution...

And poor countries do import lots of grain from temperate countries, but if you are a desperately poor country with nutrition issues, it's not so easy to produce enough manufactures to feed yourselves on Kobe beef, French cheeses, and Omaha steaks...

Un-Believable...

From the Wapo article everyone is talking about today:

The hands-off approach also was a matter of philosophy. Rather than scrutinize banks directly, the Fed decided to push them to appoint internal risk managers who imposed their own checks and balances. Regulators focused on watching the watchmen. Bernanke's predecessor, Alan Greenspan, said that banking was becoming too complicated for regulators to keep up. As he put it bluntly in 1994, self-regulation was increasingly necessary "largely because government regulators cannot do that job."

In a meeting with economists, Bernanke apparently dismissed claims that the housing crisis was in a bubble. Krugman writes that this new news has led him to think worse of his old department head.

However, here at "Economists for Firing Larry Summers" we never had such a rosy opinion of the Fed Chair in the first place...

Also, I'll weigh in on Krugman's claim that Obama "was always centrist". My view is rather that, on social issues, or things such as health care, he wanted to be as liberal as possible. On financial crisis issues, I suspect it's rather the case that he wasn't sure what the proper course of action was, and so took the opinion of the most alpha-malish liberal economist from Harvard he could find, assuming, that, if you're tenured at Harvard at 28 you must be on top of things. Obama could hardly have known about how worthless many leading Harvard economists are...

Moral Support...

Jonathan Schwarz links Greg Mankiw telling me I'm a coward for my anonymity, then cites "A Doubter's Companion" by John Ralston Saul: "In short, the people who cry loudest for a level playing field fall into two categories: those who own the goalposts and fools." Which category is Greg Mankiw in?

And then concludes:

The horrifying reality is that Greg Mankiw may actually believe that there's no reason for an economics graduate student to be worried about attaching their name to criticizing Larry Summers (and Greg Mankiw). How can anyone believe money and power have anything to do with what happens in academic economics? The only power that matters is the power of ideas. I mean, how else can you explain the fact that Greg Mankiw has an endowed chair at Harvard, one of the most left-wing institutions on the face of the earth?

Lol -- I've long argued that, by far, the most influential department at Harvard is the Economics Department. And look at how left-wing the Economics Department is -- Greg Mankiw, Robert Barro, Larry Summers (on temporary leave), Martin Feldstein, Edward Glaeser, Andrei Shleifer... Harvard has a large econ department and they aren't all conservatives, but still, overall, Harvard's liberal reputation is undeserved.

You Can't Quit Me...

A fourth (fourth!) e-mail from my new pen pal, N. Gregory Mankiw, who is no doubt happy I've moved on to pointing out that Paul Romer is deeply ignorant about growth and development.

Greg gives me permission to post his e-mails again, and writes: "This will be my last email to you. If at some point in the future, you are interested in open, civil discourse, let me know. --Greg"


Which I find strange given that my first e-mail said:

"Dear Professor Mankiw,

I'm a grad-student economist-blogger concerned about economic policy, and so am asking leading economists to comment publicly on current Fed policy for my blog readers.

Do you think the Fed's current Monetary Policy stance is too tight? Should the Fed adopt an inflation target of around 2.5-3%, and do more Quantitative Easing? The Fed's unemployment forecast for Q4, 2010 is 9.3-9.7%, while it expects inflation to be 1.4-1.7%. Is this acceptable? And if so, why/why not? Are the risks of doing too much and too little really symmetric?

I look forward to hearing you weigh in on this key economic policy question. I would also like to post your response on my blog.

Very Respectfully Submitted,

Thorstein Veblen"

What wasn't civil or respectful in the above? To recap, Greg responded to me by calling me a "coward".

In the future though, Greg, I might not respond so quickly to your emails as I'm finishing up my QJE submission, but I'm sure my blog readers at this point are hoping there is more where this came from and I have no doubt you'll furnish the goods.

Tiger Woods, who still dominates golf because he is a legitimate talent, has lost his position for violating cultural norms about sex. (OK, OK, he might have taken performance-enhancing drugs too, but I don't see how those drugs would have helped his short game -- putting and chipping. And everyone who has ever played golf knows that the short game is 90% of the sport, and that requires a delicate touch and hours of practice.)

Leading academic Macroeconomists never had such talents. Yet, as Matt Yglesias pointed out, because they have made and are making conventional mistakes, we have a Macroeconomist whose mistakes have effected millions of people celebrated on the cover of Time and Tiger, whose mistakes mostly hurt his wife, is now the worst person on the planet.

UPDATE: (edited typos above...)

Paul Romer is Alarmingly Ignorant

Via Econlog, Paul Romer says:

"I would distinguish questions about development from questions about growth. Development is the set of questions around why some people, some nations have very low standards of living compared with others...

What's wrong in many parts of the world is they don't have these institutions, and of the two [kinds], it's much more the market institutions which are fundamentally lacking, because if you think about it, a poor country in sub-Saharan Africa could get enormous benefits from just making use of what's already known in the rest of the world without necessarily contributing to that body of knowledge itself. If they could just put in place institutions that let them essentially freeload, take advantage of what's already known, they could do much better."

Most of the difference between the third and first world is in agricultural technology. So what Paul is saying is why are the Africans and Amazonian Brazilians so stupid that they don't just adopt the latest high-yielding, rust resistant variety of Winter Wheat from Iowa? It must be their institutions, Paul sayeth. Well, of course, their soils are completely unsuitable for wheat developed for Iowa. African pests are completely unlike European or North American pests. What Africans need is a higher yielding variety of Cassava, developed for Africa -- except they can't exactly take that technology from rich countries now, can they?

Somebody hasn't read his Alfred Crosby, his Jared Diamond, his Jeffrey Sachs, his Andrew Kamarck...

Famous Conservative Textbook Author Offers the Economists for Firing Larry Summers some unsolicited advice

I'll honor this famous conservative economist's request to keep his e-mail confidential. Hence, I will just paraphrase it here:

He e-mailed out of genuine, heartfelt concern that we Economists for Firing Larry Summers are spending too much time blogging, and too little time working on our dissertations. He sees no value-added to society whatsoever of having a course which teaches His textbook blogged, nor can think of any reason why spending a few minutes to write a review of His book would be beneficial to anyone, but advises that this time would not be spent "optimally" in the sense that it will not help our careers. You see, he merely e-mailed out of concern for our future job market placement. And, btw, we are shrill and don't show enough deference and respect for older economists, those who ushered in the Golden Era of Macroeconomics (1970-2008) of which He played an important role.

You see, I myself shouldn't blog b/c I spend:
1. An hour blogging
2. 8 hours doing research, and
3. 45 minutes on hold w/ United (of which 30 minutes was thumbing thru the Accidental Theorist, searching for on which page Paul Krugman says wage cuts in a liquidity trap increase employment as Bryan Caplan asserts)
4. 15 minutes jogging
5. Several hours reading news and other blogs...

My response:

Dear Sir,

To write is to think more deeply about any given issue. That's why it is a shame that there is no writing in the first year of PhD programs... Without doubting your sincerity, I think your point is wrong on the merits. And as I learned little in my first year Macro courses (Micro and Metrics were also largely a waste of time), I believe rather strongly that your generation of Macroeconomists need to be taken down a notch (or three), not up.

I accord scholars respect based on their ideas, not their CVs, and I defer to scholars whose work has taught me something. Academia isn't Feudal Japan -- your age and rank don't guarantee you automatic respect nor should it.

On your blog, I see no mention of the Fed's obviously overly-tight policy stance right now. I saw no mention of the Fed's obviously overly-tight policy stance last summer. I saw no mention that the stimulus this spring was too small (you argued against). I am forced to conclude that you are not up to speed. Other economists, such as Joe Gagnon, Ryan Avent, Scott Sumner, Paul Krugman, Brad DeLong and Tyler Cowen have all been out front on this, and yet you demand I show you the same respect accorded them.

Sorry, Harvard man, you haven't earned it.

-TV

The Wages Debate

I comment on this Bryan Caplan post, in which he says that, in a liquidity trap, reducing wages increases Aggregate Demand if labor demand is elastic and that this is what Paul Krugman said back in 1999. I asked where PK says this, am still waiting for a response.

My response was:

"If labor demand is elastic" -- In a steep recession, w/ interest rates at zero?

OK, so prices would tend to fall. We're in a situation w/ nominal interest rates pinned at zero, and we more in a deflationary direction. So real interest rates up. (Caplan considered nothing about interest rates, and seems to have forgotten the the liquidity trap assumption)...

Real interest rates up shifts Aggregate Demand which way?

Sumner then wonders why wages must fall for Spain.

Wages down for small-open economy Spain means Net Exports up. (To an extent, this would mitigate impact of lower wages in US case too.) Spain's prices won't decrease 1 for 1 w/ wages b/c much of Spain's products are purchased elsewhere, so the real interest rate rises less in the Spanish case. However, the rest of Europe has Net Exports down and downward pressure on prices, which means AD is definitely down for the "rest of Europe" and that for Spain it "depends on the elasticities", although likely the net export effect will dominate. Overall, European AD falls (perhaps some crazy elasticities would overturn this...)...

If Spain devalues, it's not the same thing though, and here's why: in Peseta's, products from Germany and France would cost more, spain's own products, at least initially, would have the same price, increasing demand for Spanish goods at the expense of foreign goods, as in the normal case. Before, prices in spain were deflating, but w/ a devalued currency, they are inflating. So now we have Spanish AD unquestionably up. It's still beggar thy neighbor for the rest of Europe, except this increase in Spanish AD from reduction in the real interest rate will increase its demand for products from the rest of Europe. Now AD for the rest of Europe is uncertain, and for Europe inclusive of Spain also uncertain, but more likely up...

I cannot wait until my Mankiw textbook arrives so that I can check my intuition about how the economy operates in a liquidity trap.

Does Greg Mankiw Charge for Book Endorsements?

I just checked out Mankiw's latest post -- he still has nothing about current Monetary policy. What he did have, though, was what looks like a paid advertisement for Steven Landsburg's latest book, the same Steven Landsburg with whom this blog has crossed swords with in the past. What makes me suspect is that Greg Mankiw is a businessman first and academic second. Of course, we'll never know if Mankiw pimps his blog, but from Greg's description of Landsburg's book -- "it is much fun. Reading it is like having dinner and sharing a bottle of claret with a smart, creative, iconoclastic friend." it sure sounds like a bottle of claret wasn't all that Gregory and Steven shared...

Greg Mankiw Responds

Here is an opinion, but not on the topic you asked about:

I have stumbled upon your blog a couple times, and I must say that I am very much put off by it. The blogosphere is fill with too much rude ad hominem rhetoric. Engaging in it under a pen name seems particularly cowardly. I recommend having the courage of your convictions by revealing your name. Otherwise, stop the mean-spiritied attacks on Larry Summers and other economists of note.

Greg

To which I responded:

One unsolicited opinion deserves another:

I have stumbled upon your blog a couple times, and have seen your writings, including a speech you gave as President Bush's CEA Chair, and I must say that I am very put off by it. The world is filled with too many conservative white male economists detached from the real world who give horrifically bad economic advice, sell overpriced and low-quality textbooks, and are accountable to no one. Removing the comment section from your blog seems particularly cowardly, you should be ashamed to charge $178.50 for your textbook, and calling tax cuts for the rich and social security privatization "deficit reduction strategies" in your speech as CEA chair was tantamount to prostitution. I recommend having the courage of your convictions by restoring your comment section, cutting the price of your textbook in half, denouncing the failed positions you took in the Bush Administration, and calling the Fed out on its misguided policies over the past year and a half, which continue to affect millions of people.

Yours,

Thorstein Veblen

P.S. The course I am TA'ing for next quarter will be using your favorite textbook, and so I'm going to blog the course and review your book, which I haven't seen yet. I won't be pulling any punches, but I will also take your advice and refrain from cheap shots. If you wanted to be non-ideological about it, you could actually use my review to make future editions of your text better.

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

What creeps me out is why he wants to know my name? I explained pretty clearly that I'm a grad student blogger. He wouldn't recognize my name anyway. WTF?

Economic Perspectives from Kansas City

Interesting blog here.

Some highlights: "Bernanke made a theoclassical economist, Patrick M. Parkinson, the head of Fed supervision. The future essay will show that this long-time Fed economist has a track record of failure because of his fundamentalist beliefs in the gospel of anti-regulation and resultant naïve beliefs that "sophisticated" market participants are impervious to fraud."

"Theoclassical" economist! That's my new favorite word...

Harvard Swaps so Toxic Even Summers Won't Explain

Here.

I tend to think part of the problem was that Harvard panicked and sold the swaps at the worst possible time -- around the time I was using my student loan money to buy into the market. Also, I'd like to know what Harvard's damage is as of today. The market has recovered quite a bit from this summer, what matters is how Harvard's endowment does in relation to assets as a whole. If Harvard's endowment loses 30% when the market is down 45%, that doesn't strike me as a stupidly risky investment strategy... but if Harvard's endowment was down 30% at a point when the Dow was only down 25%, then it's a bit of a head-scratcher, as college endowments should arguably be a less risky with their investments than young single males 20+ years from retirement...

From the Mailbag...

Andrew Kamarck's "The Tropics and Economic Development" (1976) arrived this afternoon, as did David Landes' "The Unbound Prometheus".

I just finished the Kamarck book -- chalk it up as another book (a.k.a., like the Crosby series) I'm bitter I was never assigned, but had to stumble upon by myself randomly. The knowledge that geography is terribly important for development and why has been around for a long time, but still is not widely taught by economists.

Landes I bought more for the storytelling and anecdotes rather than for believable theories about why some countries are rich and others are poor...

A Question for Macroeconomists...

Is the Fed's Monetary Policy too tight? Should the Fed adopt an inflation target of around 2.5-3%, and do more Quantitative Easing? The Fed's unemployment forecast for Q4, 2010 is 9.3-9.7%, while it expects inflation to be 1.4-1.7%. Is this acceptable? And if so, why/why not? Are the risks of doing too much and too little really symmetric?

I look forward to hearing you weigh in on this key economic policy question.

Very Respectfully Submitted,

Thorstein Veblen



UPDATE: Tyler Cowen was the first to reply to a slightly different question (I emailed him first, and then simplified the question). He, not surprisingly, agrees. It speaks well of him that he would reply.

UPDATE2: Joseph Stiglitz responds (automatic) -- he is out of the office. He'd almost certainly want to see a slightly higher Fed target, but I guess we'll have to wait 'till Monday.

UPDATE3: Greg Mankiw replies: "Who are you, really?" To which I responded that I'm basically just a grad student who's adviser has a huge man-crush on Larry Summers ("Larry Summers is brilliant!"), as does virtually every other white non-Hispanic male economist in America, so this blog is anonymous so as not to screw myself on the job market next year...



The likes of Ryan Avent, Scott Sumner, Joseph Gagnon, Matt Yglesias, Brad DeLong, Paul Krugman, and Tim Duy are all pushing for the Fed to do more. I suspect Menzie Chinn supports this, and Tyler Cowen believes the Fed should do more as well. Calculated Risk is likely supportive. Mark Thoma thinks the Fed can do more, but that the focus should be on more fiscal policy. Fine, but the economists at the Fed should still be receiving a clear message that they are screwing up.

I'm seeing what other economists I can get to comment. I suspect no economists will want to be quoted on an anonymous blog w/ an incendiary title, and in any case are too busy writing and refereeing Very Serious academic papers to make any public pronouncements on Macro policy mistakes which are affecting millions of lives, but I'll at least give them the chance to prove me wrong.

We can then let the facts over the next year declare the winner.

Those who think the Fed should do more can get proved wrong is if hyperinflation breaks out which is so hard to combat that repeated increases in the Federal Funds rate and $1.5 trillion reduction in the Fed's balance sheet aren't enough to forestall massive inflation.

But that just doesn't sound like it's in the cards now, does it?

To make it fair we'll say the point where Fed critics lose is just 4%. (In reality, 4% inflation wouldn't exactly qualify as a Domesday scenario, especially if accompanied by much lower unemployment...) Let me know if you support the Fed and you think this is unfair...

Samuelson on Mankiw

At Calculated Risk .

"The 1980s trained macroeconomics -- like Greg Mankiw and Ben Bernanke and so forth -- became a very complacent group, very ill adapted to meet with a completely unpredictable and new situation, such as we've had. I looked up ... Mankiw's bestseller, both the macro book and his introductory textbook, I went through the index to look for liquidity trap. It wasn't there!"
Paul Samuelson, June 2009

Also:

But anyway. The craze that really succeeded the Keynesian policy craze was not the monetarist, Friedman view, but the [Robert] Lucas and [Thomas] Sargent new-classical view. And this particular group just said, in effect, that the system will self regulate because the market is all a big rational system.

Those guys were useless at Federal Reserve meetings. Each time stuff broke out, I would take an informal poll of them. If they had wisdom, they were silent. My profession was not well prepared to act.

And this brings us to Alan Greenspan, whom I've known for over 50 years and who I regarded as one of the best young business economists. Townsend-Greenspan was his company. But the trouble is that he had been an Ayn Rander. You can take the boy out of the cult but you can't take the cult out of the boy. He actually had instruction, probably pinned on the wall: 'Nothing from this office should go forth which discredits the capitalist system. Greed is good.'

On Summers:

"Well first let me say that I have big admiration for Larry Summers as an economist. However, when he was at MIT as an undergraduate, he never took a course of mine!

But I think he was wise. If he had people could always say, 'well, he's traveling on someone else's steam.' There's a Chinese wall between him and me. Any view he expresses and any view I express -- there might be some overlap, but there's nothing synchronized.

So you're not in touch with him now?

No."

Remember, Larry Summers' hero is Milton Friedman. No surprise that Samuelson and Summers weren't "in touch".