Larry Summers, in retrospect

Not really any surprises in Peter Baker's article on the White House economic team. Still slightly annoying that reappointing Bernanke and waiting so long to fill the Fed vacancies doesn't register at all, much less as clear and critical mistakes. Always breathtaking how little those who cover economics for the NYT actually know. Peter Orszag comes out looking awful -- caring about the short-term budget deficit is actually counterproductive in a severe recession/liquidity trap. Summer's ability to get others to lie for him continues to be amazing -- the White House spokesman who said Summers didn't ask for a car when others have said he did. Summers looks to have been on the right side of the Auto bailouts, Goolsbee on the wrong side (which we already knew, but is still a bit troubling, as Goolsbee still has Obama's ear).

I'm still curious how the $900 billion that Summers & Romer thought were prudent got turned into just $825 in the ask to Congress. Annoying Baker still quotes the "$800 billion stimulus" when it was actually $700 net of the AMT patch. If political considerations were really why Summers & Romer went small on the stimulus, then why didn't they do it in patches (like, insist the AMT get done separately, or put a chunk of stimulus in the budget/health care)? Or make it conditional on the economic performance? And why did they pretend for the next year and a half that they had gotten the stimulus exactly right?

The answer is, of course, that Larry Summers cares about Larry Summers. Larry Summers is brilliant -- he doesn't make mistakes of this nature. Therefore, there was to be no altering of the stimulus once it was a done deal -- even once it was clear to all that the stimulus was too small. And especially since it was clear from day 1, that would have just wounded Summer's pride all that much more. Admitting a clear mistake on what was actually a conceptually simple issue would have demystified Summer's supposed brilliance, and so he had to hang on. And that's how the Democrats lost 61 seats.

I'm actually somewhat hopeful that Obama Economic Team II will be a touch better...
but step #1 would be to move heaven and earth to get Peter Diamond confirmed. I'm not getting that vibe from the WH...

Robots and Wages...

What is the impact of Robots on Wages? Yglesias linked modeled behavior .

My take, of course, is that it's impossible to say but that if there are specific jobs robots can do, then there is likely to be short-term wage pressure on those jobs. In the long run, however, I'd discount the idea that this will necessarily have a huge impact on wage inequality. Turns out robots can probably never do the type of face-to-face, human-like interaction which will only become more valuable in the future. Jobs like being waited on, having your house cleaned, getting a massage... Jobs for which the demand will increase more than 1 for 1 with GDP per capita... (I really doubt massage chairs reduced demand for actual massages...) Second point is, robots fall into the "extremely high TFP" category generally, which means they could be subject to digital camera or computer-like price declines, quickly becoming affordable for rich and poor alike.

Long story short is that even cheap-labor replacing technological advance alone necessarily carries no implications for wage inequality. (Could go either way...)

The interesting thing from the Modeled Behavior post was the view that the income difference between the US and Mexico is only due to a change in institutions. Hence, they argue, take a housekeeper in Mexico, put her in LA, and voila, because of the better institutions in LA, she can now clean more houses because she's more productive, thanks to the unique institutions in LA, such as good traffic, that Mexico cannot replicate.

Of course, that is not the case. She would get paid more for the same work because the US is far wealthier than Mexico, and because Americans are wealthier, we can afford to pay more for a housekeeper. Also, there are relatively fewer unskilled workers in the US, so of course the demand-and-supply yield a different equilibrium. The income-level difference could, of course, be primarily a story of institutions, but it need not be the proximate cause of the wage differential any more than the wage differential between Delaware and West Virginia (at $64k to $26k, is similar to the difference between the US $45k and Mexico $15k is necessarily due to institutions. Human capital, history, trade costs, and historical trade costs could all be factors as well...

Larry No More...

This Administration just got better...

The Euro...

OK, the Euro, as a common currency, has probably not increased trade much, if at all. The basic logic -- separate fiscal authorities, and less-mobile labor markets in the US -- mean that it's clearly less desirable to have a common currency than in the US.

And yet, is this factor at the core of the European problem now? See Krugman's latest.

I tend to think this is just a small part of the problem, albeit larger for the smaller countries within Europe... Since those are higher risk countries, they get double-whammied having their currency float with Germany, meaning that they can't save themselves by devaluing in times of trouble.

But, the real problem, make no mistake, is that Jean-Claude Trichet and other European central bankers are complete fools. His big fear over the past few years has been inflation, a fear which has proven to be unfounded. Had the smaller, poorer countries been able to devalue, then Germany would be doing comparatively worse. But Germany isn't doing well, even though their currency has been much cheaper (thanks to being pegged to troubled countries), which isn't what we'd expect according to the Euro-was-a-bad-idea-and-is-at-the-heart-of-it mess...

The Euro might have been misguided, but the real idiots are Europe's monetary authorities...

Contrast this with Japan. Japan is also not doing well. Hasn't done well for nearly a generation. Should we therefore conclude that Shikoku and Tohoku, heck, the entire Inaka secede from the Yen? Actually, might not be a bad idea... But yet, that the Kanto and Kansai regions, and Japan's economy over all, have not done well imply that a good bit of the blame lies with Japan's foolishly conservative central bank, not the monetary policy decision of Chiba.

Executive Pay and the Superstar Effect...

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

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

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

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

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

Oh, no he didn't...

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

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

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

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

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

Bernanke Looking Better by the Day...

From Politico .

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

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

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

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

One Reason QE2 Might Work Better than it "Should"

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

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

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

What do Conservative Economics think of QE2?

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

Newsflash: Europe in Trouble!

See this .

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

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

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

"Summers Cast as Dysfunctional Force"

Read it here.

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

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

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

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

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

The Battle to Come...

Check this out.

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

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

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

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

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

Economists for Firing Larry Summers are back!

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

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

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

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

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

Frustrating times...

Blog Name Change... Suggestions?

1. Economists for Firing Ben Bernanke

2. Economists for Giving Narayana Kocherlachota a noogie

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

other ideas?

Too Busy To Write Anything Substantive, but...

Awesome! Summers out!

Notice...

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

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

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

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

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

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

Boehner calls for Summers' resignation

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

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

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

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

Tim Geithner is Behind the Curve...

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

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

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

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

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

How strange is too strange?

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

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

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

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

Statistics in the Hands of Idjiots...

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

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

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