There has been an outbreak recently of people picking on the usefulness of dynamic stochastic general equilibrium (DSGE) models in analyzing macroeconomies, particularly for policymaking and forecasting purposes. This has been going on for a long time, and I confess to having been one of the guilty parties. In the past those of us doing it have tended to emphasize the unreality of assumptions in these models, such as rational expectations and general equilibrium. Although newer models have allowed for limited versions of heterogeneous agents, many of them have also assumed a homogeneous agent. Positivist instrumentalism is used to justify making obviously unrealistic assumptions in order to achieve empirical understanding and especially forecastibility. While the calibration of DSGE models have allowed them to be able to replicate past outcomes, their ability to forecast the future or provide even conditional policy advice, the latter what they are supposed to do best given their supposed ability to satisfy the Lucas Critique, has proven very poor, with 2008-09 the poster boy for this. Supposedly front room central bankers are highly frustrated with what they are getting from their DSGE modelers in the back rooms (although they also use Klein-style quasi-Keynesian models and purely atheoretical VAR-type time-series models as well), with these complaints becoming public and many criticizing these models.
The most recent outbreak first showed up on the infamously anonymous Econ Job Market Rumors site only to get repeated by Noah Smith and some others who note that these models simply are not used by any private consultants or investment firms or, well, any private firm that anybody has been able to dredge up in lengthy comments, although one commenter noted that at least one firm uses an ability to DSGE model as a screening device for hiring people, given that this does take some quantitative skills, even though these people are not being hired to actually do any DSGE modeling. This lack of any such use by the private sector is touted as the final bottom line proof of the ultimate worthlessness of these models.
On the other hand others argue that this is unfair and overblown, with Tyler Cowen weighing in that even if there are problems with DSGE models, people should merely "devalue" rather than "dismiss" them, the latter argued to be unreasonable and narrow-minded, marginalrevolution.com/marginalrevolution/2014/01/the-devalue-and-dismiss-fallacy-methodological-pluralism-and-dsge-models.html . (This has a link to Noah's post, which I seem to be unable to link to for whatever reason.). The comments on Tyler's post go further in defending the DSGE approach more generally on the basis of its consistency with micro optimization that is foundational for micro, and this is all about microfoundations naturally, and "we cannot throw out all our textbooks!" blah blah blah. One defender did claim that DSGE models, "in all but name," are used by private firms, although without mentioning any specifically, and somebody on Noah's site brought up Computable General Equilibrium (CGE) models, which are used by private firms, but only for micro rather than macro purposes.
So why has all this back and forth become so heated and nasty? Part of it is that the defenders of DSGE have been fully arrogant and have fought back and maintained their position, even as they have been ridiculed and attacked by many. I dislike invoking what looks like conspiracy theory, but the hard fact is that the advocates of DSGE modeling in its varied forms continue to control both the top journals as well as the top departments in economics. One of the more serious alternatives that has been put forward to DSGE models has been Agent-Based Models (ABM). I know that not a single ABM paper has been published in a top 4 journal. I know that when these are submitted, they are rejected on such grounds as "this is not an equilibrium model," which is a sign that failure to fit into the DSGE paradigm is sufficient for the papers to be rejected. The defenders of DSGE trumpet this lack of such papers getting into the top journals, actually bragging about it, although most loudly on anonymouse sites like EJMR. Rather than evidence of suppression of competing ideas, this is seen as proof positive of the rightness of their position. It is this, and their stranglehold on the research departments of most central banks as well, which draws forth the ridicule and opposition when their models have so clearly failed to deliver the advertised goods.
Let me recognize that DSGE modelers are trying hard to make their models more useful for studying things that have occurred. They are introducing heterogeneous agents in the form of intervals containing continua of agents who as an interval act like the homogeneous agent of the older models, although allowing some endogeneity of the distribution across the interval, such as a wealth distribution. They are introducing financial frictions into them, thereby supposedly Minskyizing them. Some now even have forms of bounded rationality rather than full rationality in the form of extra elements added to the stochastic shocks that are already assumed to be driving everything in these models. T'hey have long had price and wage stickiness in them, leading to the New Keynesian forms of these models, with such ad hoc devices as the Calvo pricing mechanism fairy, although most Post Keynesians and even some other Keynesians view wage and price stickiness as far from being key to a model being "Keynesian." Indeed the idea that wage and price flexibility will eliminate business cycles is a serious myth, speculative bubbles showing that excessive price flexibility can cause and aggravate them, and the general failure of the DSGE models to handle those one of their biggest weaknesses.
In any case, given the combination of arrogant self-satisfaction and defensiveness by the DSGE modelers in their various redoubts and the clear annoyance and dismissal of these models, most crucially by many who should be their main customers, policymakers, with this added rub of their complete non-use by the private sector, this fight is likely to continue. They may provide "discipline," as their advocates note, but I also know that their appeal to micro is not accepted particularly by real micro general equilibrium theorists, who pretty much scorn DSGE models.
Barkley Rosser
Added: DSGE models should be distinguished from Computable General Equilibrium (CGE) models. These are open to some of the same criticisms as DSGE, but not nearly as much so. These have been around for a long time and used for policy purposes, but are strictly micro. A well-known example is their use in predicting impacts on trade flows by sector NAFTA. Several competing models were used that gave answers with different numbers, qualitatively similar answers in terms of which sectors would be affected how, although one can argue that this qualitative matter could be determined without them. In any case, their strictly micro focus differentiates them from DSGE models, and while flawed, are used by private sector firms and viewed as more successful than DSGE ones.
Monday, January 13, 2014
Thursday, January 9, 2014
Noah Smith And His Commenters Miss Boat On Fiscal Policy In 2013
I cannot make the link seem to work, but earlier this evening at Noahopinion, he posted on Bad Event Studies, arguing that the supposedly contractionary fiscal policy implied by the sequestration that started after March, 2013, may have provided a bad event study to test the relative strengths of monetary and fiscal policy, particularly market monetarism versus Keynesianism. He proposed various combinations of outcomes, and in the end basically said we do not know because people may have been acting in earlier years on expectations about what was going to be done in 2013 in monetary and fiscal policies. However, throughout, he and all the commenters accept the idea that fiscal policy was contractionary during the year.
This is wrong.
As is so often the case, what was going on at the state and local levels was completely ignored. From June 2009 until the end of 2012, roughly 750,000 government jobs were lost. Of those about 36,000 were at the federal level, while the rest were at the state and local level, with a good 500,000 of them at the local level. Quite a few people in fact noticed during this period that the biggest drag on the economy was this downward pull from coming from the fiscal "policy" of the state and local governments aggregated, which of course is not somthing consciously controlled, and hence we do not think of it as "policy."
In 2013, all that changed. In February, local governments began to hire and by midyear state governments did also. I was only able to get numbers on this from a Washington Times report of all places in September, which drew on BLS numbers I could not find, but they reported that the combined increase in employment by the two together from February through August was 74,000. Given that housing prices have continued to rise since then and they play a major role in this, it is near certain that this number was higher by the end of 2013.
I did find from a BLS report in December the total of federal government jobs lost for the year through November. That was 92,000 and can be blamed on the sequester. Looks like pretty much of a wash.
So, the bottom line is that looking at fiscal policy in its entirety for 2013, it was neither stimulative nor contractionary. The contraction coming from the federal sequester appears to have been about offset by expansion at the state and local levels. There is simply no way to use 2013 to test any of this for this reason.
This is wrong.
As is so often the case, what was going on at the state and local levels was completely ignored. From June 2009 until the end of 2012, roughly 750,000 government jobs were lost. Of those about 36,000 were at the federal level, while the rest were at the state and local level, with a good 500,000 of them at the local level. Quite a few people in fact noticed during this period that the biggest drag on the economy was this downward pull from coming from the fiscal "policy" of the state and local governments aggregated, which of course is not somthing consciously controlled, and hence we do not think of it as "policy."
In 2013, all that changed. In February, local governments began to hire and by midyear state governments did also. I was only able to get numbers on this from a Washington Times report of all places in September, which drew on BLS numbers I could not find, but they reported that the combined increase in employment by the two together from February through August was 74,000. Given that housing prices have continued to rise since then and they play a major role in this, it is near certain that this number was higher by the end of 2013.
I did find from a BLS report in December the total of federal government jobs lost for the year through November. That was 92,000 and can be blamed on the sequester. Looks like pretty much of a wash.
So, the bottom line is that looking at fiscal policy in its entirety for 2013, it was neither stimulative nor contractionary. The contraction coming from the federal sequester appears to have been about offset by expansion at the state and local levels. There is simply no way to use 2013 to test any of this for this reason.
Yasraeh's Law
"In other words, the economy grows with every new worker." -- Allen Greenberg
As the above chart shows, "supply creates its own demand" only began to make its mark in the 1930s and "Say's Law" is not much older than that. Thomas Sowell, Robert Clower and Steven Kates have all tried to clear up what Clower has termed a "mare's nest" of confusion about what Say said and meant. "To this day," wrote Clower, "the source of the Keynes phrase ‘supply creates its own demand’ remains a mystery."
Marx criticized it as "the theory of compensation as regards the workpeople displaced by machinery." Jevons upheld it as a "principle recognised in many parallel instances." Regardless of whether or not the principle is or was "Say's Law", what did Say have to say about this erstwhile "theory of compensation"? In book 1, chapter 7 of his Treatise on Political Economy, "Of the labour of mankind, of nature, and of machinery respectively," Say wrote:
From Hearsay to Yasraeh
I have described the lump-of-labor fallacy claim as "an inverted Say's Law on steroids." But if the mare's nest formerly known as Say's Law isn't really Say's Law of Markets, then perhaps it would be more fitting to call the lump of labor claim an inverted Hearsay's Law on steroids or Yasraeh's Law, for short.
As the above chart shows, "supply creates its own demand" only began to make its mark in the 1930s and "Say's Law" is not much older than that. Thomas Sowell, Robert Clower and Steven Kates have all tried to clear up what Clower has termed a "mare's nest" of confusion about what Say said and meant. "To this day," wrote Clower, "the source of the Keynes phrase ‘supply creates its own demand’ remains a mystery."
Whatever its original source, the phrase ‘supply creates its own demand’ is a far cry from Say’s phrase that ‘products pay for products’.
After much pondering of Keynes’s remarks on Say and classical economics in the General Theory and earlier, I now conjecture that Keynes confused Mill’s interpretation of Say’s ‘theory of markets’ with the problematic presumption that seems to run through the writings of most pre-Keynesian economists, to the effect that there are unspecified forces (invisible fingers or hands?) operating ‘behind the scenes’ to ensure short-run viability of private-ownership economies.So Say didn't say what Keynes said Say said, see? But note "the problematic presumption that seems to run through the writings of most pre-Keynesian economists." For clarity's sake, let call that problematic presumption Hearsay's Law. Supply creates its own demand. Technology creates more jobs than it destroys. A cheap market will always be full of customers. The economy grows with every new worker.
Marx criticized it as "the theory of compensation as regards the workpeople displaced by machinery." Jevons upheld it as a "principle recognised in many parallel instances." Regardless of whether or not the principle is or was "Say's Law", what did Say have to say about this erstwhile "theory of compensation"? In book 1, chapter 7 of his Treatise on Political Economy, "Of the labour of mankind, of nature, and of machinery respectively," Say wrote:
Whenever a new machine, or a new and more expeditious process is substituted in the place of human labour previously in activity, part of the industrious human agents, whose service is thus ingeniously dispensed with, must needs be thrown out of employ. Whence many objections have been raised against the use of machinery, which has been often obstructed by popular violence, and sometimes by the act of authority itself.
To give any chance of wise conduct in such cases, it is necessary beforehand to acquire a clear notion of the economical effect resulting from the introduction of machinery.
A new machine supplants a portion of human labour, but does not diminish the amount of the product; if it did, it would be absurd to adopt it. When water-carriers are relieved in the supply of a city by any kind of hydraulic engine, the inhabitants are equally well supplied with water. The revenue of the district is at least as great, but it takes a different direction. That of the water-carriers is reduced, while that of the mechanists and capitalists, who furnish the funds, is increased. But, if the superior abundance of the product and the inferior charges of its production, lower its exchangeable value, the revenue of the consumers is benefited; for to them every saving of expenditure is so much gain.
This new direction of revenue, however advantageous to the community at large, as we shall presently see, is always attended with some painful circumstances. For the distress of a capitalist, when his funds are unprofitably engaged or in a state of inactivity, is nothing to that of an industrious population deprived of the means of subsistence.
Inasmuch as machinery produces that evil, it is clearly objectionable. But there are circumstances that commonly accompany its introduction, and wonderfully reduce the mischiefs, while at the same time they give full play to the benefits of the innovation. For,
- New machines are slowly constructed, and still more slowly brought into use so as to give time for those who are interested, to take their measures, and for the public administration to provide a remedy.
- Machines cannot be constructed without considerable labour, which gives occupation to the hands they throw out of employ. For instance, the supply of a city with water by conduits gives increased occupation to carpenters, masons, smiths, paviours, &c. in the construction of the works, the laying down the main and branch pipes, &c. &c.
- The condition of consumers at large, and consequently, amongst them, of the class of labourers affected by the innovation, is improved by the reduced value of the product that class was occupied upon.
Besides, it would be vain to attempt to avoid the transient evil, consequential upon the invention of a new machine, by prohibiting its employment. If beneficial, it is or will be introduced somewhere or other; its products will be cheaper than those of labour conducted on the old principle; and sooner or later that cheapness will run away with the consumption and demand. Had the cotton spinners on the old principle, who destroyed the spinning-jennies on their introduction into Normandy, in 1789, succeeded in their object France must have abandoned the cotton manufacture; every body would have bought the foreign article, or used some substitute; and the spinners of Normandy, who, in the end, most of them, found employment in the new establishments, would have been yet worse off for employment.
So much for the immediate effect of the introduction of machinery. The ultimate effect is wholly in its favour.
Indeed if by its means man makes a conquest of nature, and compels the powers of nature and the properties of natural agents to work for his use and advantage, the gain is too obvious to need illustration. There must always be an increase of product, or a diminution in the cost of production. If the sale-price of a product do not fall, the acquisition redounds to the profit of the producer; and that without any loss to the consumer. If it do fall, the consumer is benefited to the whole amount of the fall, without any loss to the producer.
The multiplication of a product commonly reduces its price, that reduction extends its consumption; and so its production, though become more rapid, nevertheless gives employment to more hands than before. It is beyond question, that the manufacture of cotton now occupies more hands in England, France, and Germany, than it did before the introduction of the machinery that has abridged and perfected this branch of manufacture in so remarkable a degree.
Actually, that's not far off Dorning Rasbotham's 1780 Thoughts on the Use of Machines in the Cotton Manufacture. Unlike Squire Rasbotham, however, M. Say didn't indict some ephemeral, unspecified "they" as saying there is "a certain quantity of labour to be performed." Instead, in his 1821 fourth letter to Malthus, Say specifically refutes arguments made by Sismondi about the harmful effects of machinery.
Good for Say! And even better that Say specified his own assumptions for the providential reabsorption of the workers displaced by machinery: "supposing even they immediately find capitals to set them to work at a fresh business..." Got that? Assuming they immediately find new employment... it's all good. Alvin Hansen remarked on this convenient assumption in his 1931 article, "Institutional Frictions and Technological Unemployment":
If we could assume that the displaced workers had somehow found new employment and were again earning wages, then indeed there would be a net gain in total real purchasing power arising out of the additional goods which they produce. But this is to put the cart before the horse, to assume the problem solved without explaining how it happened. And this is, indeed, what Say, Mill and Ricardo did. They argued that increased product means increased purchasing power. They assumed, without explaining how it happened, that the increased production had already occurred. If idle productive factors are set to work to make goods there will be no want of a market. Goods are exchanged against goods. Such was their argument. But the mechanism of labor reabsorption they did not explain.
...
The Say-Mill-Ricardo analysis assumed without question that idle productive resources would ere long be set to work to produce goods. The only question to which they addressed themselves was whether or not the new production would find a market.Thus the "problematic presumption" Clower mentioned is indeed connected to Say's Law of Markets but only as an assumption that the problem of unemployment has been already been solved without explaining how it happened. That is, if we suppose that displaced workers "immediately find capitals to set them to work at a fresh business" then the Law of Markets assures us that the new production will find a market. It is not the Law of Markets, however, that immediately sets them to work!
From Hearsay to Yasraeh
I have described the lump-of-labor fallacy claim as "an inverted Say's Law on steroids." But if the mare's nest formerly known as Say's Law isn't really Say's Law of Markets, then perhaps it would be more fitting to call the lump of labor claim an inverted Hearsay's Law on steroids or Yasraeh's Law, for short.
Wednesday, January 8, 2014
Does The Polar Vortex Over The Eastern United States Mean Global Warming Is Over?
Not particularly. Record temps are going on in Australia, and it has been warmer over the North Pole and in Moscow than in parts of the eastern US. November set an all time record for world average temperature and December was well above long term averages, despite it being colder than normal in that all important eastern US.
That noted, it must be recognized, and has been by serious climate watchers, that indeed the rate of increase of average global temperature has slowed substantially in the last 10 years, if not completely halted, although the global warming deniers spout on about it being 15 years, which is not the case given that 1998 was an outlier way on the upside. In any case, global average air temperature is not clearly rising at this time, even as the polar vortex now exiting the US does not prove this.
However, this does not mean that global warming has stopped. Curiously enough, warming above that predicted appears to be happening in the oceans below 700 meters. The main models used by the IPCC observers model the air, the surface water, and the deep water. Air is now not warming as much as predicted, but the deep ocean is doing more so than predicted. Looking at the total surface, it looks like warming is still going on, although I recognize that the models are not doing a good job of explaining why we should be seeing this particular pattern. But one must expect that warming at the depths will at some point manifest itself in the higher levels. Maybe we do not need to worry about warming of the air for a few years, but we may well face much worse warming of the air in the not too distant future when this comes bubbling up, as it were.
There is also the matter discussed by Martin Weitzman in Philadelphia about how climate outcomes probably exhibit fat tails due to nonlinear dynamics effects. But we do not know how to deal with such matters in policy terms.
Finally, I am not going to take sides in the matter of what the polar vortex shows or what caused it. There is a serious argument that it may be due to global warming, the "warm ocean, cold continent" effect theory, which others dispute. However, there is also the fact that contrary to the claim of Rush Limbaugh that the term "polar vortex" was cooked up for this particular event, its first use appears to have been in 1974 when it was invoked as part of the then seriously considered theory that we were moving into a new ice age and was part of that.
BTW, I have noted this before, but will repeat it again, just in anticipation of somebody handing me the standard story. Yes, by 1974 and certainly the later 70s, the ice age theory was falling out of fashion and not appearing in academic papers, basically a media scare phenomenon by then, although in fact it was not until about the mid-70s that global average temperatures began to rise again after a period of gradual decline starting in the 1940s. However, there was a close debate over global warming versus cooling in the early 70s, with the academic papers evenly split in 1971. It was CO2 versus aerosols. What tilted the argument was that aerosols fall out of the atmosphere quickly, whereas CO2 does not. But this was not factored in properly in 1971 and in fact global cooling was going on, so there was a real debate at that time, even though it was basically over by 1975.
That noted, it must be recognized, and has been by serious climate watchers, that indeed the rate of increase of average global temperature has slowed substantially in the last 10 years, if not completely halted, although the global warming deniers spout on about it being 15 years, which is not the case given that 1998 was an outlier way on the upside. In any case, global average air temperature is not clearly rising at this time, even as the polar vortex now exiting the US does not prove this.
However, this does not mean that global warming has stopped. Curiously enough, warming above that predicted appears to be happening in the oceans below 700 meters. The main models used by the IPCC observers model the air, the surface water, and the deep water. Air is now not warming as much as predicted, but the deep ocean is doing more so than predicted. Looking at the total surface, it looks like warming is still going on, although I recognize that the models are not doing a good job of explaining why we should be seeing this particular pattern. But one must expect that warming at the depths will at some point manifest itself in the higher levels. Maybe we do not need to worry about warming of the air for a few years, but we may well face much worse warming of the air in the not too distant future when this comes bubbling up, as it were.
There is also the matter discussed by Martin Weitzman in Philadelphia about how climate outcomes probably exhibit fat tails due to nonlinear dynamics effects. But we do not know how to deal with such matters in policy terms.
Finally, I am not going to take sides in the matter of what the polar vortex shows or what caused it. There is a serious argument that it may be due to global warming, the "warm ocean, cold continent" effect theory, which others dispute. However, there is also the fact that contrary to the claim of Rush Limbaugh that the term "polar vortex" was cooked up for this particular event, its first use appears to have been in 1974 when it was invoked as part of the then seriously considered theory that we were moving into a new ice age and was part of that.
BTW, I have noted this before, but will repeat it again, just in anticipation of somebody handing me the standard story. Yes, by 1974 and certainly the later 70s, the ice age theory was falling out of fashion and not appearing in academic papers, basically a media scare phenomenon by then, although in fact it was not until about the mid-70s that global average temperatures began to rise again after a period of gradual decline starting in the 1940s. However, there was a close debate over global warming versus cooling in the early 70s, with the academic papers evenly split in 1971. It was CO2 versus aerosols. What tilted the argument was that aerosols fall out of the atmosphere quickly, whereas CO2 does not. But this was not factored in properly in 1971 and in fact global cooling was going on, so there was a real debate at that time, even though it was basically over by 1975.
Does Laurence Kotlikoff Understand Apple’s Business Model?
He wants to Abolish the Corporate Income Tax presumably because it would increase the real income for workers. Tax Justice Network has a must read challenging the supply-side nature of Kotlikoff’s argument. I just want to comment on this claim:
Apple’s tax return says it all: The company, according to one calculation, paid only 8.2 percent of its worldwide profits in United States corporate income taxes, thanks to piling up most of its profits and locating far too many of its operations overseas.Tax Justice Network gives credit to Citizens for Tax Justice for this reality:
But Apple is a perfect example of a corporation that does not actually move many jobs offshore but rather is engaging in accounting gimmicks to make its U.S. profits appear to be generated in offshore tax havens.Maybe Dr. Kotlikoff should read the latest 10-K filing for Apple. There he would learn a few things such as the fact that Apple outsources it production preferring to be in the design and distribution business. The vast majority of its R&D personal are U.S. employees. We also see this quote from their 10-K
As of September 28, 2013, the Company had approximately 80,300 full-time equivalent employees and an additional 4,100 full-time equivalent temporary employees and contractors. Approximately 42,800 of the total full-time equivalent employees worked in the Company’s Retail segment.Since about 40% of Apple’s sales are to U.S. customers, it is reasonable to believe that over 16,000 of these Retail segment employees are also U.S. workers.
Tuesday, January 7, 2014
Senate Approves Yellen
This is not going to be long or have any links. However, I am simply going to express my pleasure that finally the US Senate has confirmed the nomination of Janet Yellen to serve as Chair of the Board of Governors of the US Federal Reserve System. One can argue that there should be no Fed or that it should be structured differently or that it is so under the thumb of this or that interest or set of interests that she will not be able to do anything useful or worthwhile. But I think in spite of all of this, she is the best person to sit in that seat and deal with the issues that the Fed faces, which are very difficult indeed. She is intelligent, knowledgeable, and with a calm personality that is needed for a position of such responsibility where one may have to face emergency situations.
I note that there were many Republicans voting against her. I think that much of that was due to pressure from outside groups, particularly Heritage Action which has had the gall to "score" this vote thereby pressuring GOP senators to vote no, with this decision to score being based on their complaint that the Fed has become "politicized." That this is supremely hypocritical is just screamingly obvious.
I shall also note that back in 2009 I was the first person to publicly call for her to receive this appointment. I wish her the best in this challenging job.
I note that there were many Republicans voting against her. I think that much of that was due to pressure from outside groups, particularly Heritage Action which has had the gall to "score" this vote thereby pressuring GOP senators to vote no, with this decision to score being based on their complaint that the Fed has become "politicized." That this is supremely hypocritical is just screamingly obvious.
I shall also note that back in 2009 I was the first person to publicly call for her to receive this appointment. I wish her the best in this challenging job.
Sunday, January 5, 2014
Experts debunk 150-year-old theory
I like that headline. It's actually a sub-head. The top headline is Will surge of older workers take jobs from young (not to be confused with Will Surge of Older Workers Take Jobs From Young?).
There's even a tiny bit of "balance," featuring Jamie Galbraith, sandwiched into the story:
Still, many remain unconvinced.
James Galbraith, a professor of government at the University of Texas at Austin, has advocated for a temporary lowering of the age to qualify for Social Security and Medicare to allow older workers who don't want to remain on the job a way to exit and to spur openings for younger workers.
He doesn't buy the comparison of older workers to women entering the workforce and says others' arguments on older workers expanding the economy don't make sense. If there was a surplus of jobs, he said, there would be no problem with people working longer. But there isn't.
"I can’t imagine how you could refute that. The older worker retires, the employer looks around and hires another worker," he said. "It's like refuting elementary arithmetic."Experts refute 7000-year-old elementary arithmetic?
Why not? If experts can debunk a 150-year-old theory that's actually a 123-year-old parody of a theory, it should be elementary to refute that fusty old, Sumerian stuff. Go for it, April Wu!
Saturday, January 4, 2014
Will Surge of Older Workers Take Jobs From Young?
"'We all cannot believe that we have been fighting this theory for more than 150 years,' said April Yanyuan Wu, a research economist at the Center for Retirement Research at Boston College... The theory Wu is referring to is known as 'lump of labor,' and it has maintained traction in the U.S., particularly in a climate of high unemployment."
"The central intuition of Greek tragedy, as of psychoanalysis, is that there is one, unique fact which each individual anxiously struggles to conceal from himself, and this is the very fact that is the root of his identity." -- Harold Rosenberg, "The Riddle of Oedipus"
Over at The Conscience of a Liberal, Paul Krugman moans about "Zombies and Cockroaches" -- ideas "that should have died long ago in the face of evidence or logic" and ideas "whose wrongness is so obvious, once pointed out, that the people who stated it claim that they did no such thing... Next thing you know, however, the roaches have invaded all over again."
Dean Baker at Beat the Press marvels at the cognitive dissonance inherent in the notion that according to various news sources, "at the same time we have no jobs because the robots took them we must also struggle with the fact that we have no one to do the work because everyone is old and retired."
I've got news for Krugman and Baker. It's not an ideas problem. It's an identity problem. Forget about zombies, cockroaches, robots and retirees for a moment. Consider, instead, that archetypal tragic Greek mother-fucker, Oedipus. Discussing "The Riddles of Oedipus," Rosenberg continues:
Kierkegaard describes a type of despair in which the self "wills desperately to be itself -- with the exception, however, of one particular, with respect to which it wills despairingly not to be itself." Action is heroic when, in addition to displaying courage, fidelity, etc., it involves an overcoming of this automatic will to ignorance, when it reverses the process that repels the one particular and forces the actor to embrace it. ...
The tension of Oedipus arises from its hero's insistence on continuing the investigation as an aim to be fulfilled after its horrid findings are as predictable as a result in mathematics. In action the disclosure of the self is an event in the self's coming into being as tragedy -- or as comedy.
So much for tragedy and the heroic. There is another word for action that doesn't remotely seek to overcome the will to ignorance: farce. Marx's famous quip, in his Eighteenth Brumaire of Louis Bonaparte, about world-historical facts and personalities occurring "the second time as farce" neglects to mention the third and fourth times and all the perpetual repetitions after that -- perhaps because all these clownish re-runs cease to be "world-historical" in any meaningful sense.
Helvetius offered another perspective on ignorance and foolishness: "Man is born ignorant;" he wrote in his Treatise on Man: His Intellectual Faculties and His Education, "he is not born a fool; and it is not even without labour that he is made one." (Might we edit that to say "it is not even without a lump of labour..."?) Helvetius went on to explain:
The man who knows nothing may learn; it is only requisite to excite in him the desire of knowledge. But he who is falsely learned, and has by degrees lost his reason when he thought to improve it, has purchased his stupidity at too dear a rate ever to renounce it.Much to the Sandwichman's dismay, an article appeared yesterday that rehearsed the fable that there is a lump-of-labor fallacy at the core of concerns about unemployment. I won't bother repeating the rebuttal beyond mentioning that the fallacy claim is a convoluted and dumbed-down version of Say's Law. Not only will an increase in labor supply automatically result in a proportionate increase in demand for labor, the "economists" maintain, but anyone who doubts such a auspicious outcome is guilty of believing that there is only "a fixed amount of work to be done." "Nonsense on stilts" doesn't begin to describe the arrogant stupidity of the claim. And, of course, it is impossible to refute such idiocy because it is so full of double-talk that no one can follow the claim itself, let alone the refutation.
Here is a list, in alphabetical order, of the headlines under which the story appeared yesterday and today:
AGING AMERICA: Will surge of older workers take jobs from young?Back in September of 2012, I wrote to April Yanyuan Wu and Alicia Munnell of Boston College, the authors of a Pew Charitable Trust report featured in the article. I explained that the fallacy claim was a canard and that I had written several scholarly articles rebutting the claim. Wu replied that she was "glad to hear that our results are consistent with those of your work." I wrote back to tell her that is not what I had said. I didn't receive a reply to my second message.
Are older people in the workforce stealing jobs from the young? Some experts ...
Are older workers stealing jobs from the young?
Are older workers taking jobs from young?
Do older workers steal jobs from younger ones?
Do older workers take jobs from the young?
Economists debunk claim that older workers who stay on keep younger workers...
Economists: Older workers aren't bad for young, economy
Economists: Older workers aren't hogging jobs
Experts debunk myth of old vs. young fight
Misconception: Older workers take jobs from young
Mythbuster: Elders don't take jobs from young
Old People are Stealing Jobs from Young People
OLD VS YOUNG
Older Americans in workforce don't keep jobs from the young, economists say
Older workers aren't taking jobs from young, economists say
Older workers blamed for stealing jobs from young
Older workers don't take away jobs from young, experts say
Older Workers Taking Jobs from the Young? Nonsense! Say Economists
Older Workers Taking Jobs From The Young? Not So Much, Study Says
Perception persists that older workers take jobs from younger work force
Research: Boomers won't squeeze younger workers out of jobs
Researchers fight 'labor lump,' suggesting older workers are keeping jobs from...Surge of older workers could take jobs from young
Will a surge of older workers take jobs from the young?
Will a surge of older workers take jobs from the young? Economists say the ...
Will A Surge Of Older Workers Take Jobs From Young?
Will Surge Of Older Workers Displace The Young?
Will surge of older workers take jobs from young?
To Hell with April Wu, Alicia Munnell, Jonathan Gruber, Matt Sedensky and all the other hack economists and reporters who keep propagating this lie and calumny. What I want to know is why the non-hacks don't stand up to this perpetual hogwash. It wouldn't be hard to do, intellectually. But is there, perhaps, something in the economists' unspoken "code of honor" that prevents them from naming that "one unique fact" that is the root of their collective identity?
What might that "one unique fact" be?
Laffer on the Bush Recovery
Via Paul Krugman, Rob Wile interviews Art Laffer:
"Usually when you find the model this far off, you've probably got something wrong with the model, not that the world has changed," he said. "Inflation does not appear to be monetary base driven," he said.Paul applauds this bit of intellectual honesty but let’s read further:
"If you look at [the] 2001-2002 [financial crisis], we barely had a decline in GDP, it corrected itself fairly quickly. The only other time we had intervention was in the 1930s. I think we had a Great Recession, and the reason we had a Great Depression, was because of intervention, not in spite of it."Seriously?! Never mind it took years for the employment to population ratio to crawl back over 63%. Did Laffer forget about how the Federal Reserve lowered interest rates? While I think John Taylor’s rants that monetary policy kept interest rates too low for too long are misplaced, it least he recognizes that monetary policy was expansionary. And Greg Mankiw never tired of excusing Bush’s fiscal expansionism with claims it was needed to offset the prior recession. But I guess we should excuse Laffer as Republican economists are very good at making contradictory claims when cheering for Team Republican.
Friday, January 3, 2014
Asymmetric cycles: very simple, verging on simplistic! Verging on - Hell, it is. Still...
Ok: here's the idea: monopolistic competition, many identical producers face identical (inverse)demand functions:
Pi/P = M/P - Qi
Pi is the ith producer's nominal price; P is the average price, Qi is the ith producer's quantity. M is the money supply. Each has no variable costs, only fixed, for simplicity. So we know that the optimal relative price - that which maximizes revenues- is simply half of M/Pi, as is the optimal quantity. In a world without menu costs, the price level adjusts so that M/P = 2. Suppose it were less than 2. Then each producer's optimal relative price is less than 1, so all would cut prices until M/P went back to 2 , at which point each would be happy charging what others are charging.
I want to add menu costs and examine two cases. We cut M in half first. Then we double it.
First case: Here we have two equilibria, one where none adjust and one where all adjust, if menu costs lie in the range .25-1. Suppose all others adjust optimally cutting their price in half. Then real money is unchanged at 2. If you also adjust, you make profits of 1- MC (MC for menu cost). If not, you charge a relative price of 2 and sell nothing, for profits of 0. All adjust is a symmetric Nash equilibrium if MC is less than 1.
If all others fail to adjust, each faces demand curves with intercepts of 1. The firm that doesn't adjust charges a relative price of 1 and sells nothing. The firm that adjusts charges a relative price of 1/2 and sells 1/2, earning profits of 1/4 -MC. So if menu costs are greater than 1/4, none adjusting is also a symmetric Nash equilibrium. This case obviously echoes Ball and Romer's much more sophisticated "Sticky prices as Coordination failure", which inspired the whole thing. Now, there's lots of experimental evidence for coordination failure, so let's say with a negative money shock, we get the sticky price equilibrium, with output falling to 0!
The second case, however, the positive money shock, is very different. So double the money supply. If all others adjust, I face a demand curve with an intercept of 2. If I adjust as well, I gets profits of 1- MC. If I don't adjust, I charge a relative price of 1/2 and sell 3/2, for profits of 3/4 . So I - and everyone else - will NOT want to adjust if all others adjust just in case MC is greater than 1/4. In other words, all adjust is not an SNE.
On the other hand, suppose all but you fail to adjust. You face a demand curve with an intercept of 4. If you adjust, your relative price is 2 and you sell 2, for profits of 4 - MC. If you fail to adjust, you charge a relative price of 1 and sell 3, for profits of 3. So for MC less than 1, you would want to adjust if all others fail to adjust, so stickiness is not an SNE either.
In the second case, for the positive money shock, we have partial adjustment. We have a chicken game, with a mixed-strategy SNE in which each adjusts with a certain probability ( or a proportion adjust equal to that same probability).(Is this a possible micro-foundation for a Calvo fairy?)
So: sticky prices for negative shocks; partial price adjustment - and so less of an output increase - with positive shocks.
It's almost like the Old Keynesian idea of a reversed-L- shaped aggregate supply, except here the vertical segment of the L is leaning to the right.
OK so it's silly. But think about the reason for the asymmetry: It comes about because the benefit of adjusting optimally gross of menu costs is greater when demand is greater. For the negative shock, demand is greater when all adjust, so if the range is right we get two equilibria: MC greater than benefit of adjusting when when demand is low (because none adjust); MC smaller than benefit of adjusting when demand is high (because all are adjusting).
For the positive shock, demand is greater when none adjust, so the benefits of adjusting gross of menu costs are greater when none adjusts, and smaller when all adjust - but you. That's why we get the chicken structure.
I know I need pictures, as Nick Rowe told me about my last post. I will work on it.!
Happy New Year!
Pi/P = M/P - Qi
Pi is the ith producer's nominal price; P is the average price, Qi is the ith producer's quantity. M is the money supply. Each has no variable costs, only fixed, for simplicity. So we know that the optimal relative price - that which maximizes revenues- is simply half of M/Pi, as is the optimal quantity. In a world without menu costs, the price level adjusts so that M/P = 2. Suppose it were less than 2. Then each producer's optimal relative price is less than 1, so all would cut prices until M/P went back to 2 , at which point each would be happy charging what others are charging.
I want to add menu costs and examine two cases. We cut M in half first. Then we double it.
First case: Here we have two equilibria, one where none adjust and one where all adjust, if menu costs lie in the range .25-1. Suppose all others adjust optimally cutting their price in half. Then real money is unchanged at 2. If you also adjust, you make profits of 1- MC (MC for menu cost). If not, you charge a relative price of 2 and sell nothing, for profits of 0. All adjust is a symmetric Nash equilibrium if MC is less than 1.
If all others fail to adjust, each faces demand curves with intercepts of 1. The firm that doesn't adjust charges a relative price of 1 and sells nothing. The firm that adjusts charges a relative price of 1/2 and sells 1/2, earning profits of 1/4 -MC. So if menu costs are greater than 1/4, none adjusting is also a symmetric Nash equilibrium. This case obviously echoes Ball and Romer's much more sophisticated "Sticky prices as Coordination failure", which inspired the whole thing. Now, there's lots of experimental evidence for coordination failure, so let's say with a negative money shock, we get the sticky price equilibrium, with output falling to 0!
The second case, however, the positive money shock, is very different. So double the money supply. If all others adjust, I face a demand curve with an intercept of 2. If I adjust as well, I gets profits of 1- MC. If I don't adjust, I charge a relative price of 1/2 and sell 3/2, for profits of 3/4 . So I - and everyone else - will NOT want to adjust if all others adjust just in case MC is greater than 1/4. In other words, all adjust is not an SNE.
On the other hand, suppose all but you fail to adjust. You face a demand curve with an intercept of 4. If you adjust, your relative price is 2 and you sell 2, for profits of 4 - MC. If you fail to adjust, you charge a relative price of 1 and sell 3, for profits of 3. So for MC less than 1, you would want to adjust if all others fail to adjust, so stickiness is not an SNE either.
In the second case, for the positive money shock, we have partial adjustment. We have a chicken game, with a mixed-strategy SNE in which each adjusts with a certain probability ( or a proportion adjust equal to that same probability).(Is this a possible micro-foundation for a Calvo fairy?)
So: sticky prices for negative shocks; partial price adjustment - and so less of an output increase - with positive shocks.
It's almost like the Old Keynesian idea of a reversed-L- shaped aggregate supply, except here the vertical segment of the L is leaning to the right.
OK so it's silly. But think about the reason for the asymmetry: It comes about because the benefit of adjusting optimally gross of menu costs is greater when demand is greater. For the negative shock, demand is greater when all adjust, so if the range is right we get two equilibria: MC greater than benefit of adjusting when when demand is low (because none adjust); MC smaller than benefit of adjusting when demand is high (because all are adjusting).
For the positive shock, demand is greater when none adjust, so the benefits of adjusting gross of menu costs are greater when none adjusts, and smaller when all adjust - but you. That's why we get the chicken structure.
I know I need pictures, as Nick Rowe told me about my last post. I will work on it.!
Happy New Year!
Monday, December 30, 2013
The Jobless Situation: getting better, but still quite bad.
Measured using official statistics, the job situation in the U.S. is getting better, but it's still pretty bad. This is especially true for young people and members of "minority" groups, but the problem is serious for the whole market too, where the availability of jobs is measured.
The statistics in the graph show the number of unemployed workers relative to the number of available job openings (both as measured by the Bureau of Labor Statistics). As shown by the dark black line with diamonds, the ratio of the official (U3) unemployment rate to the job vacancy rate has fallen relative to its peak at the end of the official recession in the middle of 2009. But this ratio is still high: there are more than two unemployed workers for each job that's available. This is about the same as the worst of the George W. Bush years (even before the Bush/Obama recession), when the availability of jobs was much more anemic than most people would like. This "worst" is shown by the black horizontal dashed line. The current ratio is clearly much worse than during the "good old days" of the Clinton years, when there was about one job for each unemployed worker seeking one. (That's when the BLS started collecting these data.)
The statistics in the graph show the number of unemployed workers relative to the number of available job openings (both as measured by the Bureau of Labor Statistics). As shown by the dark black line with diamonds, the ratio of the official (U3) unemployment rate to the job vacancy rate has fallen relative to its peak at the end of the official recession in the middle of 2009. But this ratio is still high: there are more than two unemployed workers for each job that's available. This is about the same as the worst of the George W. Bush years (even before the Bush/Obama recession), when the availability of jobs was much more anemic than most people would like. This "worst" is shown by the black horizontal dashed line. The current ratio is clearly much worse than during the "good old days" of the Clinton years, when there was about one job for each unemployed worker seeking one. (That's when the BLS started collecting these data.)
Most people know that if an unemployed worker stops looking for a job, he or she stops being counted as officially "unemployed" and isn't part of the U3 unemployment rate. Luckily, the U.S. Bureau of Labor Statistics also calculates the U6 rate, which takes these folks -- including workers who quit searching for a job because the situation is so discouraging -- into account. The ratio of U6 to the number of job openings is shown by the purple line with the cross-marks. Looking at changes over time, the story is pretty much the same as for U3. One difference is that U.S. labor markets still haven't attained a low level that's comparable to the worst of he George W. Bush years (before the recession) which is shown by the horizontal purple dashed line. It's also hardly close to the ratio achieved at the end of Clinton years. Currently, using U6, there are about 5 unemployed workers for each vacancy counted (compared to 1.8 at the beginning of the graph).
The U.S. labor markets show a severe job shortage (with job openings being rarer than job seekers). This means that when the cut-off of unemployment insurance benefits to the long-term unemployed that's happening now shoves them to accept any damn job available (even if they're very overqualified), it will simply take jobs away from those with fewer qualifications. There will be little or no fall in unemployment as the desperate long-term unemployed shove those with short job tenure out of their jobs. (The "long-term unemployed" have been looking for jobs for more than one half of a year. Currently they represent about 37% of the unemployed labor force and about 2.6% of the total labor force.)
-- Jim Devine
Friday, December 27, 2013
Macro stuff from aan AD/AS dinosaur
Recently there has been a lot of attention given to the two equilibria that one gets from the interaction of a Fisher rule and a monetary policy rule in the presence of the zero bound. The typical depiction uses a diagram with the nominal interest rate on the vertical axis and inflation on the horizontal axis. I wanted to present the material to my students and thought it would go better if I translated the problem into AD-AS terms. In doing so, the issue of the comparative stability of the two equilibria - which has been debated- pops up in a somewhat new light - or so I think, but I'm probably wrong. Anyway, here's the example:
The monetary policy rule: R = Rn + a(I - It), where R = the real interest rate, Rn is the natural rate, I is inflation and It is target inflation. The zero bound on the nominal interest rate, i, entails the following:
i = R + I = Rn + a(I - It) + I greater than 0 implies that I is greater than (a/(1+a)) It - Rn/(1+a)
I also have an IS relation : Y= 500 - 100*R, where Y is real output, and
Y*= 800, where Y* is potential output
Now let a= 1/4, Rn = -3, and It = 4
AD ( in I, Y space) - or IS-MP, if you prefer, has the following characteristics:
At any inflation rate above 3.2 (which is where the zero bound starts to bind) AD is given by Y = 900-25*I
For inflation rates below 3.2, R = -I, so AD is Y= 500 + 100I, so it is negatively sloped above I= 3.2 and positively sloped below
AD thus looks like the nose-cone of a rocket pointing to the right, and intersects the vertical LRAS (Y=800) twice, at inflation rates of 4 and 3 on the negatively- sloped and positively-sloped segments, respectively.
When inflation is 4, the Fed sets the nominal rate at 1, giving a real rate of -3, consistent with Y at potential. When inflation is 3, the Fed sets the nominal rate at 0 (we've hit the lower bound ) and the real rate is again -3, the natural rate. (The inflation target cannot be met in this second equilibrium)
Now for stability. If we are at an inflation rate greater than 3.2, on the downward-sloping portion of AD, with Y less than potential, all is well. Put in your (output) Phillips curves with expected inflation moving down when inflation is less than was expected and we make our way back to potential.
If we are at an inflation rate below 3.2 and to the left of potential, on the other hand, we have instability as long as the SRAS curves are flatter than the upward -sloping AD: we move further away from potential in a disinflationary spiral. If, on the other hand, the Phillips curves are steeper than the AD curve, we may have stability, or cob-webbing or a stable orbit - depending on the details of the adaptive expectations process. If expected I in t is actual I in t-1, for example, then we have stability in this case
The monetary policy rule: R = Rn + a(I - It), where R = the real interest rate, Rn is the natural rate, I is inflation and It is target inflation. The zero bound on the nominal interest rate, i, entails the following:
i = R + I = Rn + a(I - It) + I greater than 0 implies that I is greater than (a/(1+a)) It - Rn/(1+a)
I also have an IS relation : Y= 500 - 100*R, where Y is real output, and
Y*= 800, where Y* is potential output
Now let a= 1/4, Rn = -3, and It = 4
AD ( in I, Y space) - or IS-MP, if you prefer, has the following characteristics:
At any inflation rate above 3.2 (which is where the zero bound starts to bind) AD is given by Y = 900-25*I
For inflation rates below 3.2, R = -I, so AD is Y= 500 + 100I, so it is negatively sloped above I= 3.2 and positively sloped below
AD thus looks like the nose-cone of a rocket pointing to the right, and intersects the vertical LRAS (Y=800) twice, at inflation rates of 4 and 3 on the negatively- sloped and positively-sloped segments, respectively.
When inflation is 4, the Fed sets the nominal rate at 1, giving a real rate of -3, consistent with Y at potential. When inflation is 3, the Fed sets the nominal rate at 0 (we've hit the lower bound ) and the real rate is again -3, the natural rate. (The inflation target cannot be met in this second equilibrium)
Now for stability. If we are at an inflation rate greater than 3.2, on the downward-sloping portion of AD, with Y less than potential, all is well. Put in your (output) Phillips curves with expected inflation moving down when inflation is less than was expected and we make our way back to potential.
If we are at an inflation rate below 3.2 and to the left of potential, on the other hand, we have instability as long as the SRAS curves are flatter than the upward -sloping AD: we move further away from potential in a disinflationary spiral. If, on the other hand, the Phillips curves are steeper than the AD curve, we may have stability, or cob-webbing or a stable orbit - depending on the details of the adaptive expectations process. If expected I in t is actual I in t-1, for example, then we have stability in this case
Sunday, December 22, 2013
Postmodern Monetary Theory: The NSA and Unconventional Monetary Policy
On August 12, damaged by the revelations emanating from the leaked NSA documents by Edward Snowden, President Obama empaneled a commission to make recommendations for reforms of US cyber-surveillance. On December 12 this group submitted its report, “Liberty and Security in a Changing World”.
One item that has attracted a bit of attention is a proposal, lodged in Recommendation 31, that reads as follows:
First, what sort of financial adjustments would authorities engage in? It is unlikely that they would debit financial accounts, since affected parties would seek redress and, if their funds are not legally impaired, they would have a strong claim. Crediting such accounts, on the other hand, is easily accomplished. Recipients are unlikely to protest; on the contrary, they may be allied in some fashion with security authorities, perhaps providing some type of quid pro quo. In that case, the alteration of financial accounts becomes of a form of monetary transfer, and it is this activity that economists may want to consider more closely.
What is the difference between the NSA or some other agency paying an external party (by check, suitcases full of cash, etc.) and crediting their account by hacking it? Here are some of the possibilities:
1. A payment by intelligence authorities, even from a black account, is an expenditure charged to the treasury. As such, it increases the fiscal deficit (or reduces the surplus) by a corresponding amount, which in turn alters the quantity of outstanding public debt. To monetize this debt—to inject liquidity of equal amount so that the debt does not sop up existing liquidity—the central bank can expand its holdings equivalently. (Saying this does not presume that the private sector cannot generate such liquidity on its own, only that monetary authorities may wish to do this under circumstances in which private credit creation is viewed as insufficient.) Normally the treasury and the central bank are independent of one another, even if they do choose to coordinate. In the case of credit creation by the NSA, however, payment and monetization are accomplished in the same act. It is as if the central bank became the paymaster. This is efficient if liquidity expansion is indeed the goal, but calls for some form of sterilization otherwise. (Here the debiting of other accounts would be the simplest route if it could be accomplished.)
2. NSA payment through “direct deposit” is not a public expenditure and has no effect on public sector accounting. Nevertheless it does affect national income accounts in the same way that traditional payments do: if it is payment for a counterflow of goods or services it should be incorporated into final demand, while if it is a transfer payment it alters the net tax calculation. What is troublesome is the violation of double-entry accounting, since we now have flows into the accounts of some parties without flows out of the accounts of others. It should be noted, however, that the application of double-entry bookkeeping to the issuance of currency is essentially pro forma, and that, in a fiat currency world, central banks do not take on any meaningful liabilities in this process. Perhaps a fictitious liability can be designed for the NSA in order to enable the accounts to balance.
3. In the traditional practice of open market operations, central banks directly intervened only in the market for short term treasury debt. Quantitative easing has changed this: now monetary authorities can select particular credit markets, public or private, to intervene in so as to alter the structure of interest rates. NSA liquidity injections offer even more precise targeting at the level of individual market actors. It is not difficult to imagine how this practice could be defended as the least-cost method of achieving narrowly defined goals in support of financial markets. Of course, in a more roundabout manner, similar actor-targeted transfers were enacted globally in the post-2008 bailouts on a very large scale.
4. One striking feature of NSA financial capability is that it, like the virtual system it intervenes in, is borderless. Thus, an agency of the US government can increase the stock of euros, yen, pounds, renminbi or any other currency as readily as it can inject US dollars. It is easy to see how such a capability could be abused, and I can imagine that there may have been quiet discussions among the relevant authorities over this concern. At the same time, however, this global capacity opens up a new chapter in international monetary policy coordination. If, for instance, expansionary monetary policy in the US is inhibited by an unwillingness of the ECB to follow suit, explicit agreement can be circumvented.
5. The ability to intervene in any currency should also have a profound impact on the future likelihood of international monetary crises. If there is a run on a country’s currency, that country can cause foreign exchange of any denomination to simply materialize. Moreover, it no longer matters whether borrowing is undertaken in home or external currencies, since the borrower now has sovereign power over both. For countries with the capacity to engage in NSA-type activities, the distinction between soft and hard currencies may be a thing of the past.
This is just a first pass at what ought to be a deeper investigation. In the long history of money and credit, what is the significance of a public authority that can unilaterally alter the financial accounts of any market participant anywhere in the world it chooses?
One item that has attracted a bit of attention is a proposal, lodged in Recommendation 31, that reads as follows:
We recommend that the United States should support international norms or international agreements for specific measures that will increase confidence in the security of online communications. Among those measures to be considered are:
(1) Governments should not use surveillance to steal industry secrets to advantage their domestic industry;
(2) Governments should not use their offensive cyber capabilities to change the amounts held in financial accounts or otherwise manipulate the financial systems.....This last item is interesting. No documents have yet been released that suggest that the NSA or its foreign affiliates have altered financial accounts through electronic manipulation, but the commission presumably had access to a wide range of materials without knowledge of which will be made public in the future. It may be the case, then, that they are acting to preempt a future revelation. Even if there has actually been no such financial intervention, however, it is clear that there could be and that it would be prudent to consider the implications of such actions.
First, what sort of financial adjustments would authorities engage in? It is unlikely that they would debit financial accounts, since affected parties would seek redress and, if their funds are not legally impaired, they would have a strong claim. Crediting such accounts, on the other hand, is easily accomplished. Recipients are unlikely to protest; on the contrary, they may be allied in some fashion with security authorities, perhaps providing some type of quid pro quo. In that case, the alteration of financial accounts becomes of a form of monetary transfer, and it is this activity that economists may want to consider more closely.
What is the difference between the NSA or some other agency paying an external party (by check, suitcases full of cash, etc.) and crediting their account by hacking it? Here are some of the possibilities:
1. A payment by intelligence authorities, even from a black account, is an expenditure charged to the treasury. As such, it increases the fiscal deficit (or reduces the surplus) by a corresponding amount, which in turn alters the quantity of outstanding public debt. To monetize this debt—to inject liquidity of equal amount so that the debt does not sop up existing liquidity—the central bank can expand its holdings equivalently. (Saying this does not presume that the private sector cannot generate such liquidity on its own, only that monetary authorities may wish to do this under circumstances in which private credit creation is viewed as insufficient.) Normally the treasury and the central bank are independent of one another, even if they do choose to coordinate. In the case of credit creation by the NSA, however, payment and monetization are accomplished in the same act. It is as if the central bank became the paymaster. This is efficient if liquidity expansion is indeed the goal, but calls for some form of sterilization otherwise. (Here the debiting of other accounts would be the simplest route if it could be accomplished.)
2. NSA payment through “direct deposit” is not a public expenditure and has no effect on public sector accounting. Nevertheless it does affect national income accounts in the same way that traditional payments do: if it is payment for a counterflow of goods or services it should be incorporated into final demand, while if it is a transfer payment it alters the net tax calculation. What is troublesome is the violation of double-entry accounting, since we now have flows into the accounts of some parties without flows out of the accounts of others. It should be noted, however, that the application of double-entry bookkeeping to the issuance of currency is essentially pro forma, and that, in a fiat currency world, central banks do not take on any meaningful liabilities in this process. Perhaps a fictitious liability can be designed for the NSA in order to enable the accounts to balance.
3. In the traditional practice of open market operations, central banks directly intervened only in the market for short term treasury debt. Quantitative easing has changed this: now monetary authorities can select particular credit markets, public or private, to intervene in so as to alter the structure of interest rates. NSA liquidity injections offer even more precise targeting at the level of individual market actors. It is not difficult to imagine how this practice could be defended as the least-cost method of achieving narrowly defined goals in support of financial markets. Of course, in a more roundabout manner, similar actor-targeted transfers were enacted globally in the post-2008 bailouts on a very large scale.
4. One striking feature of NSA financial capability is that it, like the virtual system it intervenes in, is borderless. Thus, an agency of the US government can increase the stock of euros, yen, pounds, renminbi or any other currency as readily as it can inject US dollars. It is easy to see how such a capability could be abused, and I can imagine that there may have been quiet discussions among the relevant authorities over this concern. At the same time, however, this global capacity opens up a new chapter in international monetary policy coordination. If, for instance, expansionary monetary policy in the US is inhibited by an unwillingness of the ECB to follow suit, explicit agreement can be circumvented.
5. The ability to intervene in any currency should also have a profound impact on the future likelihood of international monetary crises. If there is a run on a country’s currency, that country can cause foreign exchange of any denomination to simply materialize. Moreover, it no longer matters whether borrowing is undertaken in home or external currencies, since the borrower now has sovereign power over both. For countries with the capacity to engage in NSA-type activities, the distinction between soft and hard currencies may be a thing of the past.
This is just a first pass at what ought to be a deeper investigation. In the long history of money and credit, what is the significance of a public authority that can unilaterally alter the financial accounts of any market participant anywhere in the world it chooses?
Saturday, December 21, 2013
Losing It Over Obamacare
I know, I know. That every GOP hack who wants to stay on Fox News and so on must relentlessly spout idiotic drivel about the old Heritage Foundation plan cooked up by Stuart Butler back in 1989 and supported by many Republicans, even being adopted successfully in MA by one Mitt Romney as governor, although all shifting into massive opposition when Obama came out for it in an effort to gain GOP support (hah!). So, I should not waste my or anybody else's time pointing out the specific lies and stupidities emitted by any such "pundit."
However, I cannot resist in the case of Charles Krauthammer in the Washington Post of Dec. 20, 2013. Yes, he is an old GOP Fox hack neocon, but partly due to the latter he occasionally shows signs of intelligence on domestic economic policies, even as on foreign policy he is AIPAC squared. So, in his WaPo column he really shows the pathetic state of those trying to block the implementation of Obamacare (OK OK, "ACA"). It may be that I am using him to complain about a syndrome so entrenched that we do not even pay it any more mind. But the basis of its ongoing constant diatribes on this matter are becoming increasingly inane and absurd. So, I shall pick this particular column apart.
He starts out with the legit complaint that Obama's claim that nobody would lose their insurance under Obamacare is the "lie of the year," but then goes off the deep end immediately afterwards with declaring that nobody knew "just how radical Obamacare is." While it promised free mammograms (shocking!) and all kinds of things, it is in reality just a "full-scale federal takeover." Really? In fact, for all its supposed radicablism, after it the US will remain the only OECD nation not providing health care to all its citizens and also the only one besides Mexico with a system that is majority private sector, with the insurance companies making lots of money out of it, even as Krauthammer somehow thinks that they are going to be in deep doo doo that they deserve because they "colllaborated with the White House in concocting this scheme and now are being swallowed by it." Yes, the evil federal government made them wait a whole month to start collecting premia from those who are not clear about their status with them in the new system, but this is not exactly the end of their profitability, and last time I checked they are mostly doing pretty well in terms of their stock valuations, shame on them!
The list of other false issues he repeats is long. So, the exchanges must get young healthy people to sign up or it is doomed according to him, whereas all it needs is healthy people with not much gain from getting especially young ones. Many millions will be dumped from their old plans and forced to get ones costing much more than those, whereas it looks like most who are losing their old insurance will get plans that are either better or cost less or both (not necessarily everybody). Employers will be able to cancel their old plans, but gee, Charles, they have that right right now. People will lose their doctors and their drug coverage, although so far the number of such cases looks pretty small. And, oh dear, the HHS Secretary has the power to break the law to loosen some of the requirements to ease the transition!
Needless to say he has not a word to say about any of the good things that are arriving with the plan. These include the ending of people being turned down for preexisting conditions, perhaps its greatest virtue, the allowing parents to have their children covered until they are 27, and that many people are getting insurance who never had it, even if the SCOTUS ruling has allowed states to reject the Medicaid expansion portion of the act, which may be its greatest benefit overall.
In the end we may have the situation politically that was there when the act was passed so long ago: people like the specific provisions of the law when they are asked about them, but are more negative than positive when asked about what they think of "Obamacare." Krauthammer joins the ongoing nonstop tirade in certain circles against it, apparently the main GOP theme for next fall's election campaign. But, while there will doubtless be another round of people being dumped from their plans after New Year's who can show up on Fox for at least another month to complain, some of them legitimately even, the evidence of new outrages is going to get very thin not too long after that, and those ranting like Krauthammer will find themselves having to struggle ever harder and more tendentiously to provide any sort of credible critique of the new program, even if many of us know that the alternative (single payer) it was originally cooked up to hold off would probably be better.
Barkley Rosser
However, I cannot resist in the case of Charles Krauthammer in the Washington Post of Dec. 20, 2013. Yes, he is an old GOP Fox hack neocon, but partly due to the latter he occasionally shows signs of intelligence on domestic economic policies, even as on foreign policy he is AIPAC squared. So, in his WaPo column he really shows the pathetic state of those trying to block the implementation of Obamacare (OK OK, "ACA"). It may be that I am using him to complain about a syndrome so entrenched that we do not even pay it any more mind. But the basis of its ongoing constant diatribes on this matter are becoming increasingly inane and absurd. So, I shall pick this particular column apart.
He starts out with the legit complaint that Obama's claim that nobody would lose their insurance under Obamacare is the "lie of the year," but then goes off the deep end immediately afterwards with declaring that nobody knew "just how radical Obamacare is." While it promised free mammograms (shocking!) and all kinds of things, it is in reality just a "full-scale federal takeover." Really? In fact, for all its supposed radicablism, after it the US will remain the only OECD nation not providing health care to all its citizens and also the only one besides Mexico with a system that is majority private sector, with the insurance companies making lots of money out of it, even as Krauthammer somehow thinks that they are going to be in deep doo doo that they deserve because they "colllaborated with the White House in concocting this scheme and now are being swallowed by it." Yes, the evil federal government made them wait a whole month to start collecting premia from those who are not clear about their status with them in the new system, but this is not exactly the end of their profitability, and last time I checked they are mostly doing pretty well in terms of their stock valuations, shame on them!
The list of other false issues he repeats is long. So, the exchanges must get young healthy people to sign up or it is doomed according to him, whereas all it needs is healthy people with not much gain from getting especially young ones. Many millions will be dumped from their old plans and forced to get ones costing much more than those, whereas it looks like most who are losing their old insurance will get plans that are either better or cost less or both (not necessarily everybody). Employers will be able to cancel their old plans, but gee, Charles, they have that right right now. People will lose their doctors and their drug coverage, although so far the number of such cases looks pretty small. And, oh dear, the HHS Secretary has the power to break the law to loosen some of the requirements to ease the transition!
Needless to say he has not a word to say about any of the good things that are arriving with the plan. These include the ending of people being turned down for preexisting conditions, perhaps its greatest virtue, the allowing parents to have their children covered until they are 27, and that many people are getting insurance who never had it, even if the SCOTUS ruling has allowed states to reject the Medicaid expansion portion of the act, which may be its greatest benefit overall.
In the end we may have the situation politically that was there when the act was passed so long ago: people like the specific provisions of the law when they are asked about them, but are more negative than positive when asked about what they think of "Obamacare." Krauthammer joins the ongoing nonstop tirade in certain circles against it, apparently the main GOP theme for next fall's election campaign. But, while there will doubtless be another round of people being dumped from their plans after New Year's who can show up on Fox for at least another month to complain, some of them legitimately even, the evidence of new outrages is going to get very thin not too long after that, and those ranting like Krauthammer will find themselves having to struggle ever harder and more tendentiously to provide any sort of credible critique of the new program, even if many of us know that the alternative (single payer) it was originally cooked up to hold off would probably be better.
Barkley Rosser
Friday, December 20, 2013
John Cochrane on the 1982 Fiscal Restraint ???
Has John Cochrane fallen off the cliff again with:
What if we got the sign wrong on monetary policy?He is motivated by post from Stephen Williamson on Phillips curves and monetary policy that starts off sensibly enough. Even this die hard believer that Keynes had a point is willing to concede that Milton Friedman got a lot of things right. Williamson is even willing to note this:
If we think there is an episode where monetary factors were important, then we should see the Phillips curve over that period, as monetary shocks tend to move inflation and the unemployment rate in opposite directions in the short run. So, consider the period of time between fourth quarter 1980 and third quarter 1982, when Paul Volcker was using monetary policy to bring the rate of inflation down.Williamson later notes what Irving Fisher taught us about the effect on nominal interest rates in the long-run:
So, over the long run, there's a clear positive correlation between the nominal fed funds rate and the pce inflation rate. Irving Fisher taught us that, in credit markets, borrowers and lenders care about real rates of return. Thus, there should be an inflation premium built into the observed nominal interest rate - if the inflation rate is higher, the nominal interest rate should be higher. This just compensates lenders for the decline in purchasing power they experience between the time a loan is extended and when it is paid back. Indeed, some mainstream models, including New Keynesian models (which are basically neoclassical growth models with sticky prices and wages) have the feature that the long-run real interest rate is a constant, determined by the subjective rate of time preference of the people who live in the model.All of this seems fine until Williamson starts musing over this:
So, suppose I am Paul Volcker, and I'm faced with a situation at point A where the inflation rate is high and the nominal interest rate is high. The curve SRLE1 is the short-run tradeoff I face. I can reduce inflation in the short run by increasing the nominal interest rate, thus moving to B. But that won't work to reduce inflation in the long run, so after increasing the nominal interest rate, I have to begin reducing it.At this point one might be best advised to stop reading as we old timers would cut in and say that the prolonged large out gap during the 1980’s was what was responsible for the dramatic reductions in inflation, which sort of became a semi-permanent feature of the US economy. But silly me had to read Cochrane’s take on this which included:
To be sure, I left the grand Volcker stabilization out of the picture here, where a sharp spike in interest rates preceded the sudden end of inflation. And to be sure, there is a standard story to explain negative causation with positive correlation. But there are other stories too -- the US embarked on a joint fiscal-monetary stabilization in 1982, then under the shadow of an implicit inflation target gradually lowered inflation and interest rates.Did Cochrane and I live on different planets some 30 plus years ago? My recollection was that Reagan’s fiscal policy was quite stimulative working contrary to Voclker’s tight monetary policy. Which is why real interest rates during the 1980’s shot up dramatically and stayed high even as inflation and nominal interest rates fell. Yea – there are “other stories too”. Stories that don’t fit the reality of the period.
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