Tokyo Request

I will be visiting Tokyo in the middle of next month. Any contacts or advice would be very much appreciated. Contacting me directly would be best.

Real Interest Rate in the Early 1980’s and the Last Few Years

Brad DeLong constructs a real interest rate series for the past 50 years using the nominal rate on 10-year government bonds minus inflation. Our graph is based on TIPS which limits us to the past few years. Brad notes:

If You Think That the Equilibrium Real Ten-Year Treasury Rate Is 2.5%/Year...as you might conclude from the historical track of the past fifty years: then the current 10-year Treasury rate of 1.87%/year is consistent with market expectations of deflation at an average rate of 0.63%/year over the next decade. If you think that the market's forecast of the equilibrium Treasury real rate over the next decade will be much less than 2.5%/year--as the real TIPS rate of -0.185/year suggests--then it seems likely that it is because the market expects a high unemployment rate for the next decade. Neither possibility seems consistent with market expectations of a Federal Reserve that understands its mission

.

I’m puzzled by the behavior of the real rate during the most recent recession period. At first, this real rate dropped from nearly 2.5% (August 2007) observed before the recession to around 1% (March 2010) as one would have hoped from Federal Reserve policies designed to offset the recession. But by October 2010, the real rate increased to 3%. I realize that this was the period when fiscal policy was trying to revive the weak economy but given the depth of the Great Recession, but most of us thought the fiscal stimulus was too weak to get us even remotely close to full employment.

But let’s also look at the early 1980’s, which was a period when fiscal policy turned stimulative for whatever reason. Some defenders of the Reagan tax cut might have argued we were in a deep recession then as well, while others justified that tax cut on supply-side silliness. Of course, macroeconomic history tells us that the Volcker Federal Reserve was hell bent on combating inflation and decided to offset the Reagan tax cuts with a period of tight monetary policy, which led to much higher real interest rates crowding-out investment. Not exactly the parable that the supply-side crowd likes to tell. But then there has always been a third school of economists who preach Barro-Ricardian equivalence. Their message – as best exemplified by “Do Higher Deficits Produce Higher Interest Rates” by Paul Evans (AER, 1985) – was that households would save all of the tax cuts so that there would be no impact on national savings and hence no effect on interest rates. That prediction was clearly not borne out by the evidence as Brad’s graph clearly shows. The good news is that we finally recovered from the 1982 recession as Federal Reserve policy eventually reversed its draconian contraction and allowed real rates to fall from their peak.

Ratings Agencies Demonstrate Power Over Markets Again (Not)!

So, Fitch has downgraded Spain, Italy, Belgium, Cyprus, and Slovenia. The market response? Yields on Spanish and Italian bonds fall, and the euro rises. Yet more reason to fear the mighty power of the ratings agencies!

Perverse Fiscal Policy

Assuming a picture is worth a thousand words, our graph is offered as an illustration of some wise words from Mark Thoma:

We need a temporary increase in government spending to increase demand and employment through, for example, building infrastructure. That would help to get us out of the deep hole we are in. Instead, the government seems to be trying to make it harder to escape. We do need to address our long-run budget problems once the economy is healthy enough to withstand the tax increases and program cuts that will be required. But the idea of "expansionary" austerity has failed.

Real government purchases fell by almost $30 billion (annualized) last year with $20 billion of this decline shockingly coming from Federal purchases. While it is true that state & local purchases have been declining since late 2007 with the cumulative decline exceeding $90 billion per year, we have also seen a significant decline in Federal purchases over the past year. We should add that Keynesian macroeconomists have always worried about the implications those state & local balanced budget requirements, which force this kind of perverse fiscal reaction to recessions. But as Barkley Rosser noted over at Mark’s blog:

Is it not the case that the main source of this outright decline in G is coming from the state and local levels with their balanced current budget rules, along with the ending of fed stim support for them? Of course, this suggests that the easiest way to offset this would be renewed support by the feds for the states and locals, but obviously this is unlikely to happen in the near future.

Federal revenue sharing should be increased but then the leaders of the Republican Party seem hell bent on balancing even the Federal budget during this Great Recession.

For Once The Military Is Right

Despite the title here I absolutely support civilian control of the military in democratically ruled countries. However, in both the US and Israel we have a weird situation where the military and the intel establishments are not only better informed and more aware of the implications of current serious policy issues than their civilian political superiors, along with their media abettors, but they are right. The issue is the Iranian nuclear program where the disconnect between not only what military intelligence knows (yes, I know, hahahaha, milintel is an oxymoron (decrepitly old joke), hahahaha), and what the public discourse in the media and the political debates and what the official policymakers are saying (including amazingly enough US Nat Sec Advisor Thomas Donilon earlier this evening on Charlie Rose) are totally out disconnected.

The media reports on this recently have become blatant, and I apologize for not providing relevant links. But, last week WaPo and NYTimes reported on how Israeli milintel were saying Iran was not pursuing a nuclear weapons program currently. Then today the NYT was a mass of conflicting stories with the ones from top Israeli governmental leadership (somewhat backed up by NSC director Donilon on Charlie Rose) arguing that Iran is indeed pursuing nukes and when or how will either Israel or the US just bomb the heck out of them blah blah blah to stop it, despite the contrary claims of their respective military intel establishments.

Sorry folks, but the people who will have to do this, either the Israeli or US military, are not all that excited about this (much less convinced by the official reports that go against their offical intel assessments, see US NIE reports). Their leaders know what is not acknowledged by President Obama in his SOTU, or Natenyahu in his public statements, or certainly not by the GOP prez candidates (with the exception of Ron Paul), that in fact Iran is not actively or currently pursuing obtaining nuclear weapons. All the war whooping and hawkishness by the political leaders and their pathetic rivals and related media and much of the public is ignorant and stupid and worthless. But, they cannot speak up publically on this matter. Let us hope that we shall muddle through this without yet another worthless new war.

It’s a Bruegal World

I just returned from seeing “The Mill and the Cross”, the remarkable remake of The Way to Calvary by Pieter Bruegal the Elder.  Some quick reactions:

1. If you were an art history major you will have multiple orgasms.  Guaranteed.

2. Even if you weren’t, if your eyes are open you will be enchanted by images that occupy a gray zone between painting and live-action film.

3. The pace is extremely slow, which works if you allow yourself to be hypnotized.  Don’t go to see it on an empty stomach.

4. The crucifixion thing is overdone, even after allowing for the fact that Bruegel overdoes it too.

5. The scene with the crows eating a dead guy’s eyeballs is really gross.

6. The people in this window on 16th century Flanders are much too clean and healthy.  This is not only a distracting anachronism, it also distances us from the world we see in Bruegal’s paintings.

7. You can see why the Dutch fought so intensely to free themselves of Spanish rule.

8. If the movie doesn’t grab you, you will find it to be a mashup of Masterpiece Theater and Bread and Puppet, except that a rich banker would never be a good guy in a Bread and Puppet production.

9. This film is auteur theory on steroids: Lech Majewski not only directed it, he did camera work, art design and the musical score.  If you don’t like it, you know who to blame.

10. How do people do those slow, gently hopping dances that Bruegal paints so well?  Can we start a new craze?

The Blade’s Response to the State of the Union Address

The transcript of what Indiana Governor Mitch Daniels said can be found here. When the Blade claims Obama’s policies were pro-poverty, what he seems to be saying that in the face of insufficient aggregate demand, the right policy should have been austerity - cutting government spending. Talk about Herbert Hoover economics!

Governor Daniels also expressed concerns about the size of the Federal deficit. Folks give this governor too much credit for the fiscal shape of Indiana, which they assert has been dramatically improved by his policies. Lest we forget, however, that a source of revenues for Indiana was the one time sale of toll rights to the private sector. Sacrificing future toll revenues to collect cash that has a lower present value is not a long-term solution to a government’s fiscal follies.

Of course, we get this rhetoric:

There is a second item on our national must-do list: we must unite to save the safety net. Medicare and Social Security have served us well, and that must continue. But after half and three quarters of a century respectively, it’s not surprising that they need some repairs.

By repairs – does he mean the Paul Ryan plan to effectively eliminate Medicare?

Finally, we get this canard:

Contrary to the President’s constant disparagement of people in business, it’s one of the noblest of human pursuits. The late Steve Jobs - what a fitting name he had - created more of them than all those stimulus dollars the President borrowed and blew.

Rebuttal outsourced to Paul Krugman.

The Radical Right in the US and Europe

Today’s mandatory reading is a news report from the New York Times about a film shown in NYPD training sessions entitled “The Third Jihad”. You should read the whole thing, but here is the CliffNotes version:

1. The feature-length film portrays the entire Muslim world as engaged in a nefarious, secret plot to destroy non-Muslim institutions and achieve global domination.

2. It was shown to about fifteen hundred NYPD officers across all ranks as part of their routine training.

3. It was produced by an organization called the Clarion Fund, which has financial links to gambling tycoon Sheldon Adelson.

4. Adelson is also the principal funder of the super PAC whose support of Newt Gingrich has propelled him to the front of the GOP presidential pack.

Put the pieces together, and what you see is a glimpse of the extreme, xenophobic right, American-style. It is our answer to groups like the National Democratic Party in Germany, Finland’s True Finns, the Austrian Freedom Party, the Danish People’s Party, Hungary’s Jobbik, France's National Front and so on. They share an authoritarian traditionalism in culture, paranoia about immigration (especially from Muslim regions) and a profound hatred of secularism and the left.  The link between xenophobia and authoritarianism is the view, fundamental to fascism, that the “true” members of the nation have a common interest that can only be undermined by the give and take of democratic politics.

The European extremists are forced to organize their own factions, since the political mainstream, including the established conservative parties, see them as echoes of a fascism their societies had actually experienced and would like to see buried forever. This consensus does not exist in the US, and proto-fascist groups can operate freely within the Republic Party. There is a possibility that one of their anointed candidates will be elected president this fall.

Incidentally, this is not about Gringrich personally. Everything in his prior public career and private life tells us he is an opportunist, and he is simply seizing the opportunities that present themselves at the moment. Nor should we assume that his backers are the only financiers of xenophobic authoritarianism; Adelson is simply the one who shows up in this specific instance.

As an American who spends a lot of time in Europe, I am troubled by the laws against racist and fascist propaganda; I worry about the slippery slope that leads to criminalization of unpopular political expression. Maybe I should be worried about the opposite too—the view that all varieties of politics are equally legitimate, that there are no hard lines that respectable political figures cannot cross.

Is the Oil Price Scare From The Strait Of Hormuz Over?

Maybe not, but there is good reason to think that maybe it is over, even though US gasoline prices were still rising over this past weekend. But that is probaby just the pass-through of the earlier spikes in crude prices due to the scare arising from Iran's threat to close the Strait of Hormuz, which it is capable of doing, if the US follows through on its newest economic sanctions, which it appears to be doing. In the longer run higher oil prices would be useful for getting us onto a more sustainable energy path, but in the short run they certainly do not help get the world economy out of its prolonged slump of recent years. I see two signs here.

The first was the report last Wednesday that Israeli Defense Secretary Ehud Barak has announced that Israeli military intelligence has concluded that Iran is not currently in active pursuit of nuclear weapons and that any decision by them to bomb Iran is "far off" in the future. Needless to say, this undercuts some of the more hysterical "bomb Iran" presidential candidates in the US. But, of course, this does not remove the new economic sanctions that Iran was objecting to and which many think that the US and Europe were going along with partly to restrain Israel from such bombing efforts.

The other sign is that over the weekend the Iranian vice president has specifically denied that Iran is planning to block the strait. One can dismiss this, just as many dismiss the anti-nuclear weaons fatwas of Iran's supreme leader, Khamene'i (that is to say, some of those who actually know that he has issued such fatwas, not widespread public knowledge), but it does look as if Iran has backed off for whatever reasons. It now looks extremely unlikely that the Strait of Hormuz will be blocked, even though the US looks to be following through on the new sanctions, which most reports say are already hurting the Iranian economy. Three further thoughts.

One is that David Ignatius claims in WaPo that this was due to Obama putting pressure on Iran through back channels. Maybe, although this smells a bit like the administration giving itself too much credit and leaking this to Ignatius. I suspect that backing off by Israel has played a bigger role.

Another point is that Iran has enough outs to avoid the worst of the economic outcomes. The main method for these sanctions is to attack settlements of oil sales through the Iranian central bank. Yes, several major customers of Iran appear to be scaling back purchases, such as Japan and China. But there are limits to this, particularly if indeed oil prices go up rather than back down (or stay steady). More importantly, Venezuela and possibly other countries are apparently setting up financial arrangements that may allow for these contracts to be completed without being directly blocked by the sanctions. So, Iran may already have seen the worst economically.

And finally, the main evidence for problems is the decline of the Iranian currency. However, such a decline makes it easier for the non-oil sector of Iran's economy to compete with foreigners and even possibly export, Iran usually suffering from the well-known "Dutch disease" endemic to so many nations dependent on exports of a highly priced natural resource. They have a respite from this a bit, although of course imports are more expensive also. Iran is taking a hit economically, but in the end the sanctions will probably backfire politically in Iran, given the strong support even by the political opposition of their civilian nuclear power program.

Hedge Funds for Human Rights

At a time when finance is coming under intense scrutiny, it is heartening to learn about hedge funds' concern about human rights. Greece is wrestling with the idea of asking (forcing) investors to accept 32 cents on the dollar. Hedge funds have been buying up the paper in the expectation that they can force Greece to pay in full.

Now the hedge funds is toying with the idea to sue the country in the European Court of Human Rights on the grounds that Greece had violated bondholder rights, surely a more serious matter than the slaughter of a few dissidents demanding democracy.

At least we now know that capital is seriously concerned about more than maximizing profits.
Thomas, Landon Jr. 2012. "Hedge Funds May Sue Greece if It Tries to Force Losses." New York Times (19 January)http://www.nytimes.com/2012/01/19/business/global/hedge-funds-may-sue-greece-if-it-tries-to-force-loss.html?_r=1&pagewanted=all

Reviewing Econometric Papers

Chris Blattman helpfully links to the syllabus for his course on research design and causal inference.  At the end is a list of questions he thinks (and I agree) would provide a useful checklist for reviewers of econometric papers.  Take a look at it.

Of course, me being me, I have some issues.

Once More on Ricardian Equivalence

I can’t let this rest.  Why should anyone bother with this idea?  RE depends on the specification of an intertemporal government budget constraint: any increase in the fiscal deficit in the current period must imply a corresponding decrease in the future, so that the relationship between the present value of the tax and spending streams remains unchanged.  But why?

Here are three arguments against the assumption of such a constraint.

1. The government’s debt/GDP ratio can and does change permanently.  Governments can borrow a lot, run up this ratio and then continue to live at their new level of indebtedness.  There is no reason why the US government cannot continue at the current debt/GDP ratio rather than the one we had on the eve of the financial crisis.  There is also no reason why this ratio cannot be increased to some higher level and maintained in perpetuity.  No doubt there is some level of indebtedness that is not sustainable, but we don’t know what it is, and in particular there is no compelling argument that says we are up against that constraint today.  (Credit markets, for what it’s worth, think US debt sustainability is a non-issue, given that they do not require a risk premium.)

2. The debt/GDP ratio is predictably altered by changes in nominal GDP.  Both real and price level effects matter.  Robust real economic growth can reduce the debt burden with no contribution from fiscal stringency, and if deficit spending increases subsequent growth (both through capacity utilization and hysterisis effects on potential income) a portion of the debt burden is directly offset.  (Models that assume away such effects simply beg the question.)  Just as relevant is the price level impact: inflation can erode the debt burden, and the question of whether such erosion is “optimal” from a representative household point of view (whatever that means—probably nothing) is irrelevant to whether such inflation will actually occur.  Note, incidentally, that the net effect of inflation on private sector wealth depends on whether the country in question runs a persistent current account surplus or deficit.

3. Finally, what we should now know from history is that it is far more likely that governments will default on their debts than pay them off.  Show me an RE model that accounts for even the possibility of default.....I’m waiting.

What does it say about the state of economics that a theory with no apparent connection to reality can spawn untold dissertations and journal articles and even crowd out rational thinking about current policy alternatives?

John Maynard Keynes on Occupy Mitt Romney

"No man of spirit will consent to remain poor if he believes his superiors to have gained their goods by lucky gambling. To convert the business man into a profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards. The economic doctrine of normal profits, vaguely apprehended by everyone, is a necessary condition for the justification of capitalism. The business man is tolerable so long as his gains can be said to bear some relation to what, roughly and in some sense, his activities have contributed to society."

Who is Voting to Shrink the IRS?

On the whole, David Cay Johnston has a very important point:

Congress will spend a trillion dollars more than it levies this year, so how do Washington’s politicians respond to the 11th consecutive year of federal budgets in red ink? They plan to shrink the IRS … if you believe government is too big and that cutting everywhere is the best way to shrink government. But this is the staff that generates revenue, and there is easy money to be made.

But then he goes a little astray with the politics:

So why would President Barack Obama and Congress cut the IRS budget? Their actions illuminate the rise of corporate power and values, and the diminishing voice of Joe Sixpack, thanks partly to how we finance election campaigns.

The how we finance elections part may be right but let’s recall that Joe Sixpack votes Republican and it is mainly the Republican Party that wants to hamstring the IRS in its enforcement of the tax laws against the larger corporations.

Scott Sumner v. Paul Krugman on a Simple Identity

Sumner tried to tease out the proposition that a rise in government purchases has no effect on the real economy from an identity, which prompted Krugman to school him on comparative statics. Sumner replies by basically repeating himself:

If Krugman were right that consumption smoothing somehow refuted Cochrane’s argument, then it would be impossible for consumers to react to a $100 million dollar fall in after-tax income as follows: Spending on consumer goods falls by $20 million. Spending on new homes falls by $80 million. Or spending on inventory accumulation falls by $80 million. Now I’m not saying that would happen, but if it did it would validate Cochrane’s claim and yet would incorporate consumption smoothing. So consumption smoothing can’t be the issue; it plays no role in whether Cochrane is right or wrong.

Time to call a time out. It is not the existence of the national income identity that is at play here but rather Sumner’s claim that the rise in the sum of consumption and government purchases necessarily completely crowds out investment. Two points:

(1) Complete crowding-out would occur if we were at full employment or if we had some sort of insane Federal Reserve policy that mandated we stay as far below full employment as we are now. Of course, neither condition describes today’s economy.

(2) Even if we did have complete crowding-out, notice that Sumner left off the transmission mechanism here. In his example, real interest rates would rise to crowd out the investment spending. So there would be at least this real effect.

As the title of Sumner’s second post notes – it is what he didn’t say that is revealing.

Update: Noah Smith and Paul Krugman anticipated my argument. First Noah:

Accounting identities are mostly just definitions. Very rarely do definitions tell us anything useful about the behavior of variables in the real world.

Then Paul:

the question is how the identity gets reflected in individual motives — is it via the interest rate, via changes in GDP, or what?

The Irrelevance Of Bond Ratings

It was front page news today, top story in WaPo, that S&P downgraded France and Austria from AAA status. Eeeeek! Except that their bond yields fell in the wake of this. The same thing happened after the US downgrade. And Japan has been downgraded 13 times, only to have the world's lowest bond yields. Really.

United Airlines' New Frontier in Ripoffs

I had about $500 worth of electronics gear stolen from my luggage in June. I spent several hours figuring out how to download the claim forms. After I filled them out, I got a brief note indicating that they received my submission.

Then I heard nothing. I spent many hours -- my guess is more than 20, mostly spent on wait times -- trying to contact somebody. I could get to an Indian call center, which could not give me any information on what to do.

After several months, I was informed that I had not included the tag from my baggage, which I did. I resent it. Many weeks later, I learned that I never sent it according to their records. After several iterations, I learned that my claim was denied because the company never received the tags.

A lawyer friend sent a letter to United. Now in January, I received a letter informing me that United does not accept responsibility for lost electronics.

Monti’s Message

I won’t get into his “rescue” program for Italy, but Mario Monti is saying what needs to be said about the current moment in EU politics.  In a word, the situation is dangerous and moving in the wrong direction.

To begin with, the continent is clearly in recession.  Economies are in the process of contracting, and every indicator of future demand—fiscal policy, consumer sentiment, investment and exports—are pointing down.  Economic misery is already baked in for 2012.

The countries that will be hardest hit, like Greece, Italy, Spain, Portugal and Ireland, have no policy levers to defend themselves.  They gave up monetary policy when they joined the euro, and fiscal deficits can’t be financed.  They are in a terrible situation.

The combination of economic hardship and political blockage is a recipe for volatile politics.  People rightfully demand action to fight unemployment and cuts in services, but the established parties have nothing to offer.  Fringe groups will be the beneficiaries, and many of them will be practitioners of the worst forms of xenophobia.  Fascist movements, complete with paramilitary wings, are on the rise in Hungary and Greece, and I would be surprised if more countries are not added to this list in the coming year.

In this context, Monti’s urgent words need to be heard.  Germany in particular needs to listen, because resentment against German policy and its moralistic pronouncements (the grasshopper and ant business, the paranoia about printing presses) will only increase, with repercussions for the German position in Europe.  If the German public thinks that the post-WWII era of humility is over, they will be in for an unpleasant surprise.  This does not mean that Germany cannot behave as a “normal” country, but it cannot set itself up as the chief enforcer of economic punishment for what is seen elsewhere as the crime of being insufficiently German.  I am not taking sides: this is the real political context of European fracture.

On a practical level, Monti is also right about Eurozone policy.  The ECB has to step in and guarantee sovereign debt inherited from the past.  Without this, a massive wave of defaults, with all this implies for the fragile European banking system, is unavoidable.  It is a choice between a difficult but manageable situation and full-tilt disaster.  Why dither any longer?

Meanwhile, the recession demands a response: its economic as well as political costs are too great.  Most European countries are unable to finance the fiscal deficits rational economic policy now requires.  This means that those who can, like Germany and the other net exporters, need to do some of this lifting themselves.  Above all, it means that there is an urgent need for a Eurozone-wide fiscal entity that can carry on countercyclical policy as the situation requires.  The constitutional process for creating such an entity should be deliberative and methodical, but a temporary, ad hoc version can and should be put into place immediately.  The alternative is simply the breakup of the zone.

Behind these particulars lies the underlying political question: is there a European people corresponding to the institutions of the single market?  If there is, then there is a reservoir of solidarity to draw on and the basis for a politics that puts the common good above short-term self interest and pejorative moralizing.  If not, the European project was always an elite illusion, waiting to fail its first serious test.

Rush Limbaugh – the President Should Fire People

Newt Gingrich has taken a page from the Occupy Wall Street crowd as he goes after Mitt Romney. While I say welcome to our side Newt, Rush Limbaugh is quite upset. Fair enough but Democrats should really highlight this:

"So Romney is out there saying that he likes being able to fire people. Folks, don't we want somebody in the White House who's gonna fire people? How are we going to reduce the size of government? Don't we want somebody who loves firing people in the White House? Isn't that what we're all talking about here?" Limbaugh said.

So according to Rush – we need to layoff even more government workers. Isn’t that part of the problem, however? We are practicing Herbert Hoover economic policy by reducing government employment during a period of slack aggregate demand?

Economics and Fracture

On the plane back from Chicago I started reading Age of Fracture, the new book by Dan Rodgers on US intellectual history since the 1960s.  I had high hopes, since Atlantic Crossings, his earlier work on the origins of Progressive-era American policy activism in European (mostly German) reform, was a fantastic read.  And, to be honest, Rodgers kept me engaged on a redeye to Copenhagen, a layover, and a second leg to Amsterdam.  You can measure a book’s readability that way.

All the same, I felt misgivings on several fronts:

Making an ASSA out of U and ME

The 2012 ASSA meetings have come and gone, and I guess I’ll have to add my reactions to the heap already beginning to accumulate in the blogosphere.

Kudos—really!—to the AEA for its new ethics policy.  Using the publication lever is exactly right, in my opinion, and I hope the disclosure requirements are copied by non-AEA journals.

My worst experience—nothing else comes close—was attending a panel of economics bloggers.  Actually, it began well with an interesting, thoughtful and directly useful presentation by Jennifer Imazeki of Economics for Teachers.  I urge everyone who teaches this stuff at any level to check out her work.  After that it was pretty dismal.  None of the other panelists seem to have thought seriously about the practical issues involved in integrating blogs and teaching.  There was little reflection on the issue of boundary-busting, that entering the blogosphere means sharing intellectual space with people coming from different academic/cognitive/experiential backgrounds.  Quit the opposite: the other panelists (Alex Tabarrock, Jodi Beggs and especially Steve Leavitt) argued that the mission of economics bloggers should be to systematically push the viewpoint of incentives and markets because that’s what econ has to offer.  There was an amusing moment in which Leavitt, noting the disconnect between the arguments economists make on the web when they discuss current issues and the parade of models in the textbooks, considered the possibility that the textbooks might be irrelevant.  That moment lasted no more than ten seconds; he dismissed the heresy and recommended that teachers spend more time on the textbooks and less on the blogs.

I congratulate myself for not getting cranky.  I made a comment which was intended to be entirely constructive.  One point was that none of the panelists had mentioned Mark Thoma’s Economist’s View, which is an essential aggregator.  I considered mentioning that one of the virtues of Mark’s site is that he links to noneconomists that economists ought to be interested in, like Andrew Gelman, the Bayesian statistician, but decided not to in order to spare the feelings of Leavitt.

As usual, however, the real action was in the hallways and over dinner.  I got more gossip about the inner workings of the Bank and the Fund than I can hope to remember, and I met lots of actual human beings corresponding to the names I recognized from books, papers and blog posts.  One standout was a fascinating conversation with a prominent economist, who will go unnamed, who has knocked himself out to inject some rationality and honesty into policy debates and who now appears to have largely given up.  His discouragement was hard to argue with—but there were hordes of young, proto-rabble-rousers at many of the sessions and receptions I attended that left me with the feeling that a significant energy recharge is taking place in the world of dissident economics.

Incidentally, Europe is really not looking good, and a Europe/US financial decoupling is absolutely impossible.  2012 augurs to be a wonderful year for bloggers, if not for humans.

The Fed Is Financing the ECB's Support For European Banks

Perry Mehrling will probably be blogging on this soon, but I cannot resist getting this news out now. I saw him at Maurice Obstfeld's Ely lecture yesterday here at the AEA/ASSA meetings in Chicago. Obstfeld spoke on "Does the Current Account Still Matter?" Answer: It no longer determines overall balance of payments because of disconnect from ever larger capital flows, but does still matter in that a country with a current account deficit may be subject to a bop crisis, whereas a surplus country is not. But that is not what this post is about.

I asked Perry if the Fed was doing what it did for a period following the Sept. 2008 crisis, taking on ECB assets onto its balance sheet. The answer from him was yes, and this is a recent development, only a month old. He pulled it up on his android: as of Jan. 5 the Fed had acquired $99.8 billion in ECB assets, all within the past month. This is not small change.

I suspect what is going on is that the European banks are really struggling to adopt to the Basel III capital requirements in the continuing recessionary environment in Europe. Given the threat they face on sovereign debt, and the ECB wanting to limit its support for the sovereign debtors directly, it has been pumping money into the banks to keep them afloat. But this has become such a difficult enterprise, they have drawn on the old facility with the Fed that was renewed some time ago. Perry may disagree, but it looks to me that this is what lies behind this very striking and important recent development.

Belated In Memoriam

RIP Christopher Hitchens. I've always loved his writing. I think he went off the rails supporting Bush on Iraq, but I am reminded of what Auden wrote about Yeats:


Time that is intolerant
Of the brave and the innocent,
And indifferent in a week
To a beautiful physique,

Worships language and forgives
Everyone by whom it lives;
Pardons cowardice, conceit,
Lays its honours at their feet.

Time that with this strange excuse
Pardoned Kipling and his views,
And will pardon Paul Claudel,
Pardons him for writing well.

Romney’s Tax Proposal

The Tax Policy Center provides its review of which taxpayers will pay more and which ones will pay less under the tax proposal introduced by Mitt Romney. A really short summary goes as follows:


(a) The well to do will pay less in taxes;

(b) The working poor will pay more in taxes; and

(c) Overall tax revenue will be significantly reduced.

But wasn’t that also the case for the Herman Cain tax proposal as well as any other tax proposal from the Republican candidates for President? And the Republicans claim they are for fiscal responsibility!

There ought to be clowns

From today's Times: "The Federal Reserve will begin later this month to publish the predictions of its senior officials about their own decisions..."

FOMC minutes: February 2012

Chairman Bernanke predicted that he would start the meeting promptly at 10 and, indeed, his forecast was correct -the meeting started at 10. Yellen began with a forecast that she would be getting into it with Plosser and Kocherlakota soon if they persisted with their standard nonsense about inflation threats and "it's all structural so what's the big deal." Plosser forecast that he would in fact claim that it's all structural, so that Yellen's forecast was a good one. He then stated "it's all structural, ladies and gentleman. Our work is done." Yellen then got into it with him, as she had predicted. At this point, Bernanke predicted that he would be stepping out in a minute to use the gents, but predicted that he would be right back. After a minute, Bernanke proceeded to step out. But he came right back and predicted that the meeting would resume, as it did. Evans then forecasted that he would forecast that he would forecast that he would forecast that he would forecast.......... (People began to file out)


Respectfully Submitted With a Forecast That I will Sign my Name But Inadvertently Misspell it,

Kavin Quenn

War Whooping on Iran

So, it is bad enough that GOP pols like Santorum are calling for bombing Iran and that reportedly 50% of the US population agrees with this, but we also have the Obama administration about to implement a seriously intensive sanctions policy on the Iranian central bank that has gotten the Iranians all worked up and making threats about closing the Straits of Hormuz. Some of this is clearly just politics, with the US in an election year and war whooping on Iran popular, while Iran is coming up on a parliamentary election on March 2, with similar sorts of tough guy strutting going on there as well as here. Needless to say, Iran is unlikely to follow through on its threat, but enjoys watching oil prices spike with the threats, thus threatening the economic recovery Obama needs for his reelection.

Let us remember certain things. While the latest US National Intelligence Estimate moved somewhat away from its previous firm denials of there being any Iranian nuclear weapons program, that movement amounted to saying that they maybe had one going on longer than we had previously thought, but continued to say that there is not one going on now. The more recent IAEA report that seems to lie behind Obama's plicy basically only amplified that somewhat, with some more recent reported simulations by some scientists of nuclear explosions and some evidence of not being fully forthcoming in certain areas. Neither report says that they have an active program to build nuclear weapons, so the vast majority of the current talk is basically hysteria, less credible than the claims that Iraq had WMD.

While Juan Cole has long argued that they would like to have the capability to build nuclear weapons, what they have done so far is completely legal according to the NNPT to which they are a party. They have a civilian nuclear energy program, which they are allowed to have, and their ongoing uranium enrichment program is fully consistent with it and not the higher levels associated with a nuclear weapons program. IAEA inspectors are still in the country, and Cole points out that we would be able to figure out if they went active because of a variety of things the inspectors and other sources would observe. And, although many dismiss this, the supreme military commander and supreme leader, Vilayat-el-faqih, Khamene'i has issued fatwas against nuclear weapons. As long as he does not undo those and remains in charge, there will be no nuclear weapons program in Iran.

What I confess to being a bit mystified about is the attitude of some of the Western European countries, who seem to be quite eager for these heightened sanctions and this confrontation. I can sort of understand that they might fear more any possible nukes from Iran due to proximity, just as Israel does. But I also think that there intel agencies ought to be able to figure out what the US intel agencies know, and that reportedly the Isreali ones do as well, even though they get majorly ignored by their politicians, that there is no nuclear weapons program in Iran.

Indeed, I am really not at all clear what Obama or anybody else thinks is going to be acheived by these heightened sanctions. Are we actually demanding that they shut down their perfectly legal civilian nuclear weapons program? Presumably a negotiation would involve some sort of deal where they are allowed to have their civilian program if they promise not to have a military program. But that is already what they are doing and repeatedly declare that they are doing. Is this really about trying to achieve regime change? This will also not work, as sanctions simply reinforce the arguments of the hardliners, just as the US sanctions have done with regard to Cuba for a half a century. The only place I know where sanctions worked was maybe in South Africa, but they had a real problem and undid it, whereas what is being demanded of Iran is for them to stop doing something that they are not doing. Really, this war whooping is getting seriously out of hand. Do we really need to go into Iran now that we finally just got out of Iraq?

Oh, and hope to see some of you in Chicago, :-).

Oy! Deja-Voodoo Economics, and some Horn-Tooting

Here we go with the RE means fiscal policy is impotent meme again! Well, this blog was on the case early - PGL and I, along with Nick Rowe in the comments, sorted the whole thing out back when the Stimulus was being enacted, I think. And now, surely, it is a stylized fact that that the stimulus was effective compared to the counter-factual - no?

On a completely different subject: remember back in the campaign Obama made noises about raising revenue by lifting the cap on the payroll tax? That still seems like a good idea to me, and something that might have political legs in the wake of Occupy and all that. I await evisceration at the hands of my fellow bloggers, at least, who IMS didn't cotton much to the idea at the time.

Oh and Happy New Year!

A Modest Case for Guarded Optimism in 2012

I think that there is reason to think that economic performance in the US and many portions of the world will do better in 2012 than has been forecast by many recently. Basically, recently many trends seem to be doing better than what has been forecast, coming out of a long period of fear of various catastrophes (and many very real problems), which have been deeply embedded into the forecasts and the markets as well. A way of looking at this is to consider the analysis in the Sunday Washington Post New Year's article by Neil Irwin, "Could 2012 be better?'

Irwin lists five factors that will determine how things go.
1) US political system behavior
2) Can European leaders balance every country's demands?
3) Performance of US housing market
4) X-factor
5) Can China manage a soft landing?

Irwin thinks that things are pretty shakey still on many of these, but is mildly optimistic that things will be better than in 2011. I think they might even be better than does Irwin.

1) This may be the one that I am least optimistic about, particularly given that this is an election year. However, it may be that the worst is past on this front, and that was manifested in the debt ceiling conflict last summer when the tea party pushed things right to the edge of a default for the first time since the US became the first and only country ever to impose a nominal debt ceiling back in 1917. The sign may well be the collapse of the House Republicans at the end of this past year over the payroll tax issue. Now, I am not sure that I agree with the payroll tax cut, given my old position that the whole social security system should have been left alone. But, in terms of politics, it seems that the tea partiers are now aware of the impact of the OWS and the fact that they were blamed substantially for the bad economic performance after the debt ceiling fiasco. Indeed, ironically, the fact that this is an election year may keep their noses to the grindstone a bit more and increase their caution regarding engaging in really outrageous actions with regard to the economy. Too many people are watching very closely.

2) I think the situation in Europe may be better than many think. I have been off and on arguing here and elsewhere that the freakouts over Italian deficits were ridiculously overblown, and now the markets seem to have figured this out, with interest rates on their borrowings having declined even further even yesterday. Despite all the recessionary trends, Germany has reported increased manufacturing. No, Europe is not going to be booming, but I think the threat of a full-blown euro collapse is largely past. The carrying on about the end of the euro by many US commentators is looking increasingly likely to be a big embarrassment, once again (some of these folks have been at this since before it was adopted, snore). Curiously, I think the biggest drag on Europe will be the effort to meet the Basel III capital requirements for banks, which is definitely restricting lending in the EU, not just in the eurozone. Europe will have a bad first half of the year, but once this Basel adjustment is in place, things may improve, if gradually.

3) Housing prices continue to decline in the US, and foreclosures continue at a high rate in much of the country, with something like a quarter of mortgages still under water. I do not see much change in any of those. However, we have seen an uptick in construction of multiple unit housing in many areas of the country, fairly steadily since the middle of last year actually. With very little construction for basically the last half a decade, there is good reason to believe that there is pentup demand and that this increase in construction can continue, even if it is limited to certain regions. Construction was the first part of the aggregate US economy to go down. Having it rising again steadily is important and may provide one of the more important foundations for keeping the US economy growing this coming year, even if not enough to really noticeably dent the unemployment rate.

4) The X-factor is the unknown shock, you know, those Minnesota real business cycle folks with their technology shocks and so on. Whatever. Well, yes, maybe the Mayan calendar people are right and the world will end on Dec. 21. But at least maybe we'll luck out before then and not have too many more natural disasters as bad as the last couple of years. Even if we do have some, it looks to me that there is more of a foundation for continuing growth now than previously, although heck, maybe the Mayan doom will hit even earlier in the year (and no, I am not being pollyanna here about some longer term problems such as global warming, although in the near term global warming actually helps the US economy on net as the reduced heating bills outweigh rising costs in other parts of the economy).

5) China does have a property bubble, with housing prices having more than tripled since 2005 along with sharp rises in price to rent and price to income ratios. For a pathetic story about what is going on, with prices now falling hard in some parts of China, see http://www.chinalawblog.com/2011/12/the_impacts_of_chinas_real_estate_crash_a_hard_rain_is_gonna_fall.htm . So, there is reason to believe that China is facing some slowdown in its growth rate. However, besides the fact that manufacturing rose in December above forecasts, there are other reasons to think this may have less impact there than has the housing crash in the US. Housing is a smaller part of the economy for one thing. Another is that China has had several quite sharp crashes of its stock markets in recent years with little impact on economic growth. China is planning for some growth slowdown, which would probably be a good thing and inevitable, but China is in much better shape to use macro policy tools including fiscal policy to offset a decline coming out of a property crash to some extent at least. This could be a problem, but for now much of East Asia seems to be performing above predicted levels.

So, all in all, folks, I think there is reason to think that 2012 may do better than many have been forecasting, although this may in the end prove to be wishful thinking on my part, even as I have a history of often forecasting doom and gloom.

Is Alex Tabarrok Saying Unpleasant Monetarist Arithmetic is Identical to Complete Crowding Out?

I am puzzled by this.

Paul Krugman has already replied noting that Brian Riedl is arguing complete crowding-out even as the economy is far from full employment. Go figure. And I have to really wonder how Brian Riedl thinks the problem is too little savings as if consumption was allegedly soaring.

But let me just add what I said in Alex’s comment box:

Krugman’s 2003 writing strikes me as the same type of concern that was contained in Sargent and Wallace’s Unpleasant Monetarist Arithmetic. Which I thought was an excellent discussion. Simply put – the long-run government budget constraint has to be honored somehow. And if markets are ever convinced that our political masters have decided to spend and spend without raising taxes – inflation would soar, which I think Irving Fisher in 1907 claimed would drive up nominal interest rates. So what is so bizarre about this argument again?

As I read what Paul has written at various times, his arguments strike me as quite clear and hardly inconsistent.