J. Bradford DeLong's Blog, page 1113

For Kevin Drum to Be "Expecting a Reasoned Critique of John Cochrane’s Claim Is Like Expecting a Reasoned Critique of the Claim that 2+2=5": Hoisted from Robert Waldmann's Archives from a Year Ago

Robert Waldmann:
Why does Fiscal Stimulus Work ?:
"Ah, now: Kevin Drum wrote about something...

...I know something about. He notes a post by John Cochrane and said he was licking his lips waiting for the Delong/Krugman demolition which, however disappointed him.

I was a little disappointed in their responses. They have plenty of detailed issues with Cochrane, many of which strike me as well taken. But I didn’t feel like they ever addressed Cochrane’s core argument. He isn’t insisting that stimulus doesn’t work. Instead, he’s taking aim at the stories economists use to explain why they think stimulus works.

He hands the mike to Cochrane:

In his words, here’s the Old Keynesian multiplier story:

More government spending, even if on completely useless projects, ‘puts money in people’s pockets.’ Those people in turn go out and spend, providing more income for others, who go out and spend, and so on. We pull ourselves up by our bootstraps. Saving is the enemy, as it lowers the marginal propensity to consume and reduces this multiplier.

But Cochrane says that New Keynesian models don’t support this story at all. When you take a look into their guts, NK models posit an entirely different underlying mechanism for why fiscal stimulus works:

If you want to use new-Keynesian models to defend stimulus, do it forthrightly: ‘The government should spend money, even if on totally wasted projects, because that will cause inflation, inflation will lower real interest rates, lower real interest rates will induce people to consume today rather than tomorrow, we believe tomorrow’s consumption will revert to trend anyway, so this step will increase demand. We disclaim any income-based ‘multiplier,’ sorry, our new models have no such effect, and we’ll stand up in public and tell any politician who uses this argument that it’s wrong.’

The problem here is that Cochrane’s fantasy has so little connection with reality that it is hard to discuss. Consider Krugman’s New Keynesian model of fiscal stimulus here [update please click this link before criticizing my assertions about New Keynesian models]

Notice there is no mention of inflation or real interest rates.

It is true that New Keynesians talk about expected inflation and real interest rates. But they do that when they discuss monetary policy at the lower bound. By contrast, if one modified a New Keynesian model with the assumption that the inflation rate is a known constant (this means setting a parameter in the new Keyensian Phillips curve to zero) then the model would imply that there is a government spending multiplier of 1. It just isn’t true that, in New Keynesian models, fiscal stimulus works only through expected inflation.

Expecting a reasoned critique of Cochrane’s claim is like expecting a reasoned critique of the claim that 2+2=5.

Now Cochrane is an intelligent person. How does he manage such regular howlers? Well we have the ambiguity of ‘no spending multiplier’. Here this ambiguously means that the government spending multiplier is one (there is no effect on private consumption), and that it is zero [no effect on real GDP]. This is typical of fresh-water fanatics when confronted by models and/or evidence. They argue that the multiplier at the ZLB is zero (as say Krugman believes it is off the ZLB). [They] then [take] a model or data which suggests that it is one is presented as proof that they were right.

I mean, really: saying this is like 2+2=5 is over charitable. Cochrane’s argument is an exposition of the result that 1=0.

DeLong and Krugman do not have the reputation of being over-polite, but they are too polite to point out the arithmetic error which is the heart of Cochrane’s argument.

That’s not all. New Keynesians have no presumption as to the sign of the effect of real interest rates on the level of consumption. This is because they have some respect for data and there is essentially no evidence that real interest rates affect consumption. This can be reconciled with utility maximization (anything can)... by making assumptions about parameters so the effect of real interest rates on consumption is tiny in the model as it is in the data.

Anyone who has the slightest interest in reality knows that real interest rates are negatively correlated with GDP growth because they are negatively correlated with investment. Someone who thinks that the effect of real interest rates on consumption has an important role in any calibrated New Keynesian model demonstrates complete ignorance. They are pure fantasies.

This explains why the DeLong and Krugman do not seem to take his claims seriously.

Plus:

Paul Krugman:
The New Keynesian Case for Fiscal Policy:
"It’s been a bit funny on the academic front...

...being a Keynesian during a Keynesian crisis. Much of the academic profession decided more than 30 years ago that the whole thing was nonsense and what we needed was an equilibrium model of the business cycle. By the time the utter failure of the equilibrium project became apparent, you had a whole generation of economists who knew that Keynesianism of any form was nonsense based on what they had heard somewhere, so they didn’t read any of the stuff, old or new--and were flabbergasted to learn that there was in fact an extensive New Keynesian literature that provided a justification for fiscal policy at the zero lower bound.

So some props to John Cochrane for at least trying to catch up. Unfortunately, he’s still working from the baseline assumption that people like me (and Mike Woodford, whom he really should be reading) must be kind of stupid, and so he can’t be bothered to actually figure out how the models work. At least I think that’s what’s happening.

As Robert Waldmann says, Cochrane’s latest seems to be driven by a confusion between the effect of fiscal expansion on GDP--which is positive in just about any NK model--and the effect on consumption, which isn’t at all the same thing. I won’t try to figure out the roots of this failure of reading comprehension; let me instead try to explain what’s really going on.

In the simplest NK models of fiscal policy, we think of an economy that faces an adverse shock in the current period, but will return to a steady state thereafter. (Maybe not in reality, but that’s another topic.) Given this setup, consumption in the current period is tied down by an Euler condition:

(Marginal utility of consumption in period 1)/(Marginal utility in period 2) = (1+r)/(1+d)

where r is the real interest rate and d the rate of time preference. If we’re up against the zero lower bound and prices are sticky, this means that r doesn’t change, so we can take first-period consumption as fixed.

But now suppose that the government expands its purchases of goods and services. Consumption is fixed, so there is no crowding out; the increase in G leads to a one-for-one expansion in real GDP. The multiplier is 1.

That looks a lot like old Keynesianism to me--an increase in government spending leads to a rise in output. Inflation has nothing to do with it.

Now, is there a way to get a rise in consumption, and a multiplier bigger than 1? Yes. That Euler condition is based on the assumption that people have perfect access to capital markets, so that they can borrow and lend at the same rate. If some of them are instead liquidity-constrained, the increase in income from the rise in G will lead to some increase in C as well, and we have a story that is even closer to the old Keynesian version.

This isn’t hard--at least it shouldn’t be for anyone with a graduate training in economics. Just try actually reading what New Keynesians write.

Noted for Your Morning Procrastination for December 2, 2014

Over at Equitable Growth--The Equitablog

Thinking About Austerity in Britain
The Cato Institute's Brink Lindsey Is Running an Economic Growth Conference This WeekZeynep Tufkeci: How TED (Really) Works
Juan Carlos Suárez Serrato and Owen Zidar: Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms
Chris Rock: It's Not Black People Who Have Progressed. It's White People
Hiroshi Nakaso: The Potential Impact of Large-Scale Monetary Accommodation
Paul Krugman: Dean Baker on Robert Samuelson's Famous Fake Prediction Failures
Nick Bunker: Thanksgiving Weekend Reading

Plus:

Things to Read on the Morning of December 2, 2014

Must- and Shall-Reads:

Marcus Wohlson:
Amazon Reveals the Robots at the Heart of Its Epic Cyber Monday Operation
David Cay Johnston:
Real World Contradicts Right-Wing Tax Theories
Anton Howe:
Anton's Econ History Reading List
Ken Rogoff:
Dornbusch's Overshooting Model After 25 Years0.
Juan Carlos Suárez Serrato and Owen Zidar: Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms
Chris Rock: It's Not Black People Who Have Progressed. It's White People
Hiroshi Nakaso: The Potential Impact of Large-Scale Monetary Accommodation
Paul Krugman: Famous Fake Prediction Failures
Nick Bunker: Thanksgiving weekend reading
Tim Duy: Yes, I Am Optimistic
Zeynep Tufekci:
How TED (Really) Works: How One Hairdresser Behind the Scenes, and Émile Durkheim, Says More About TED than All the Viral Videos

And Over Here:

Thinking About Austerity in Britain
Tuesday Book Review Blogging: Christian Lorentzen on George W. Bush's Latest
Liveblogging World War I: December 2, 1914: Karl Liebknecht
The Cato Institute's Brink Lindsey Is Running an Economic Growth Conference This Week
Robert Waldmann on the Engines of Growth
On Paul Krugman and His "Notes on the Floating Crap Game"

Juan Carlos Suárez Serrato and Owen Zidar:
Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms:
"This paper estimates the incidence of state corporate taxes on the welfare of workers, landowners, and firm owners using variation in state corporate tax rates and apportionment rules. We develop a spatial equilibrium model with imperfectly mobile firms and workers. Firm owners may earn profits and be inframarginal in their location choices due to differences in location-specific productivities. We use the reduced-form effects of tax changes to identify and estimate incidence as well as the structural parameters governing these impacts. In contrast to standard open economy models, firm owners bear roughly 40% of the incidence, while workers and landowners bear 30-35% and 25-30%, respectively"

Chris Rock:
It's Not Black People Who Have Progressed. It's White People:
"When we talk about race relations... it's all nonsense. There are no race relations. White people were crazy. Now they're not as crazy. To say that black people have made progress would be to say they deserve what happened to them before.... To say Obama is progress is saying that he's the first black person that is qualified to be president. That's not black progress. That's white progress. There've been black people qualified to be president for hundreds of years. If you saw Tina Turner and Ike having a lovely breakfast over there, would you say their relationship's improved?... A smart person would go, 'Oh, he stopped punching her in the face.'... Ike and Tina Turner’s relationship has nothing to do with Tina Turner. Nothing. It just doesn't. The question is, you know, my kids are smart, educated, beautiful, polite children. There have been smart, educated, beautiful, polite black children for hundreds of years. The advantage that my children have is that my children are encountering the nicest white people that America has ever produced. Let's hope America keeps producing nicer white people..."

Hiroshi Nakaso:
The Potential Impact of Large-Scale Monetary Accommodation:
"The Bank of Japan introduced the QQE to achieve the price stability target of 2 percent at the earliest possible time, with a time horizon of about two years... to dispel a view that... prices would not rise... to raise inflation expectations through a strong and clear commitment to achieve the price stability target of 2 percent, and at the same time to exert downward pressure across the entire yield curve through massive purchases of government bonds. As a result, real interest rates will decline, thereby stimulating such private demand components as business fixed investment, private consumption, and housing investment. The upward pressure on prices will grow stronger as demand increases and the output gap narrows accordingly. Rises in actual inflation rates will be translated into higher expected rates of inflation and thus lower real interest rates. This will reinforce the virtuous cycle as the economy is provided with additional stimulus. Since its inception, the QQE has been producing the intended effects.... In recent months, however... the decline in demand following the consumption tax hike has been somewhat protracted... crude oil prices have declined substantially... slowing the CPI inflation rates... down to 1.0 percent in September.... The temporary weakness in demand associated with the consumption tax hike has already started to wane. Meanwhile, the decline in crude oil prices will have positive effects on economic activity and push up prices over the longer-run. Nevertheless... we decided to take preemptive actions to expand the QQE at the Monetary Policy Meeting held on October 31.... I would like to address a frequently cited remark that unconventional monetary stimulus could destabilize financial markets and the economy at large by encouraging 'search for yield' activities.... A rise in asset prices and a decline in volatility are intended effects of the QQE.... [But] we should be mindful of the risk that 'search for yield' activities enter into a self-fulfilling cycle.... If a rise in asset prices creates overly bullish expectations among non-financial entities such as the corporate and household sectors, it could trigger excessive risk-taking behavior in these sectors as well. Thus far, we have not observed signs of self-fulfilling, overheated price movements..."

Paul Krugman:
Famous Fake Prediction Failures:
"Dean Baker is annoyed, and rightly so, at claims like this from Robert Samuelson that Keynesians failed to predict the slow recovery. Dean and I were both tearing our hair out in early 2009, warning that the Obama stimulus was too small and too short-lived.... Samuelson is taking the fact that this business cycle didn’t look like previous cycles as evidence that we don’t understand macroeconomics, so we shouldn’t even try to help the economy. But I was predicting a protracted jobless recovery long before the recession was official, and explained carefully why. But then I also fairly often get comments along the lines of ‘If you’re so smart, how come you didn’t see the housing bubble’, when I not only did see it (although Dean saw it much earlier), but got a lot of flak for daring to raise questions about the Bush Boom. Well, I guess you can’t expect people to be aware of what I was saying, seeing as how I only write for an obscure publication nobody has heard of."

Nick Bunker:
Thanksgiving weekend reading: "Secular stagnation: Greg Ip argues that the growing tide of elderly in wealthy countries explains a lot of secular stagnation [the economist]. The Economist also created a series of accompanying graphics [the economist]. Shane Ferro looks at the troubling demographic situation in Japan [business insider]. Hidden wealth of nations: Matthew Klein looks at London School of Economics professor Gabriel Zucman’s research on the offshoring of wealth and profits [ft alphaville part 1, part 2]. The roots of upward mobility: Richard Reeves looks at research that finds a link between inequality of non-cognitive skills and intergenerational mobility [brookings]. Derek Thompson poses a dilemma for Millennials: move to a city with affordable housing or a city with a good track record of upward mobility [the atlantic]. More work and less play than expected: Dylan Matthews tries to figure out why we don’t have 3-hours workdays as Keynes predicted [vox]. Timothy Taylor considers two approaches to encouraging work: tax incentives and social support [conversable economist] :: Free exchange: No country for young people | The Economist | "Secular stagnation" in graphics: Doom and gloom | The Economist | How a Limo Ride With Paul Krugman Changed the Course of Abenomics - Bloomberg | The costs of offshore tax avoidance, part 1 | FT Alphaville | The costs of offshore tax avoidance, part 2 | FT Alphaville | The “Great Gatsby Curve” for Character Skills and Mobility | Brookings Institution | Why It's So Hard for Millennials to Find a Place to Live and Work - The Atlantic | Why 3-hour workdays haven't happened yet - Vox | CONVERSABLE ECONOMIST: Encouraging Work: Tax Incentives or Social Support?"

Tim Duy:
Yes, I Am Optimistic:
"As long as people have babies, capital depreciates, technology evolves, and tastes and preferences change, there is a powerful underlying (and under-appreciated) impetus for growth that is almost certain to reveal itself in any reasonably well-managed economy. This ultimately is the reason that despite the seemingly persistent belief that the recessionary bogeyman is just around the corner, recessions are remarkably rare events.... Bottom Line: Perhaps, just perhaps, the US economic expansion has been consistently undersold, and continues to be undersold. It is worth considering that maybe it is time to just accept the good news without the desperate search for every dark cloud."

Zeynep Tufekci:
How TED (Really) Works: How One Hairdresser Behind the Scenes, and Émile Durkheim, Says More About TED than All the Viral Videos:
"Check this Slate ad for a journalist who will write about education policy on the high-traffic site: no need to be an expert in the topic, just an interest in the beat, and the ability to write really fast (part-time, of course while you juggle other, likely unrelated, jobs).... There are, of course, advantages to acquiring breadth as well as depth, as one should, but it still remains true: to do something well, you need to specialize, over time, and most organizations run on the fuel that is people dedicated to taking care of their corner. These people are rarely the ones on stage, or highlighted as interesting people, or celebrated as glamorous. It’s the nurse who really understands preemie babies, the electrician who takes care of the aging air-conditioning in the building that nobody else knows how to fix, and the programmer that makes the creaky legacy scheduling database work.... It’s why you can walk onto a big stage without having looked at a mirror, because you know you can trust the person whose job it is to take care of this. And the opposite is the anxiety we feel in situations where institutions don’t function as well, and where one keeps having to acquire competencies just to take care of basic functions: most places on the planet. The inability to trust this division of labor is among the most tiring aspects of living in less developed countries.... And my talk? Oh, it was about whether digital technology is helping social movements scale up without building deep organizations, and hence hitting the big time without the capacity to weather the challenges. So, yeah. Sometimes, the real magic is in the details, the specialization, and a division of labor you can rely on."

Should Be Aware of:

John Oliver:
Mocks 60 Minutes on Last Week Tonight
Charles Munger:
A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Busines
Gideon Rachman:
Obama is a lonely western liberal on immigration - FT.com

 

Amanda Marcotte:
Don’t blame liberals for Elizabeth Lauten, the Obama daughters scold, resigning:
"Liberals don’t have any power to force [Elizabeth] Lauten to resign nor do they have any power to make her Republican boss ask for her resignation. If Rep. Fincher wanted all this to blow over, it really would have.... I suspect Lauten had to go [because] she let the mask slip. Right now, there is a Republican full frontal assault on abortion rights and contraception access--which Rep. Fincher is a big part of--and Republicans are very touchy about this assault being called a ‘war on women’. They insist that attacks on abortion rights are supposedly about helping women and that the attacks on contraception access are about ‘religious freedom’ and that sexism and hostility towards female sexuality has nothing to do with it. Having some congressional staffer reveal that she thinks that you’re being immodest if you show your knees in public blows their cover and shows that nope, it’s all about their hysterical attitudes about women and sexuality..."

Ed Kilgore:
Bad Memories Down South:
"I’ve just spent nearly a week back home in exurban Atlanta, and I regret to report that the events in and in reaction to Ferguson have brought back (at least in some of the older white folks I talked with) nasty and openly racist attitudes I haven’t heard expressed in so unguarded a manner since the 1970s... the intensity of the hostility I heard towards ‘the blacks’ (an inhibition against free use of the n-word, at least in semi-public, seems to be the only post-civil-rights taboo left), who have the outrageous temerity to protest an obvious act of self-defense by a police officer.... There seems to be a complete lack of reflection on the fact that it’s the black kid who is dead and the cop who is alive and free. This skewed perception of the equities of the matter is what most reminds me of the very bad old days back home.... I don’t know if the good conservative Christian white people of Georgia will eventually hold rallies to honor Darren Wilson the way they did for William Calley, but it would not surprise me at this point."

Kevin Drum:
The Scary Mystery of Angela Merkel Is....Still a Mystery | Mother Jones:
"Take the eurozone crisis, for example. Over the past five years, Germany has seemed almost spitefully hellbent on destroying the European economy simply because Germans disapprove of the spendthrift southerners responsible for the mess—all the time self-righteously refusing to admit that they themselves played a role that was every bit as lucrative and self-serving in the whole debacle. Because of this, the European economy is now headed for its third recession since 2008. Does Merkel share this view of things? Or does she recognize what needs to be done but simply doesn't have either the will or the courage to challenge German public opinion? That's never clear. And yes, I guess I find that a little scary. This is why I don't quite get the comparison Packer makes between Merkel and Obama.... Personality-wise, perhaps, Obama and Merkel are similar. 'No drama' could apply equally well to either of them. But politically? I don't see it. Obama doesn't strike me as someone with no vision who hews as close as possible to public opinion."

Tuesday Book Review Blogging: Christian Lorentzen on George W. Bush's Latest

Christian Lorentzen:
Dad & Jr: Bushes Jr & Sr: "
It’s been five years and ten months....

...I confess to a bit of nostalgia for the nihilism that came with being governed by George W. Bush. For all the continuities, Obama arouses more earnest responses: apologetics, disappointment, head-shaking, Occupy, Edward Snowden. Bush’s arrogance has turned out to be that of a man destined to spend his golden years painting portraits of Putin, Merkel and Berlusconi like a dime-store Warhol working on commission for a UN theme bar. Retirement has now yielded a second book under his name.

Reviewers have welcomed 41: A Portrait of My Father like they miss father and son. ​Or maybe it’s ‘the soft bigotry of low expectations’:

‘Bush’s conversational storytelling makes for engaging reading,’ Peter Baker writes in the New York Times.
‘It’s folksy, sharply observed and surprisingly affecting,’ Michiko Kakutani says in the same paper.
‘A helluva good read,’ Douglas Brinkley writes in the Financial Times. ‘Bush Jr’s new memoir doesn’t feel ghostwritten: his low-key Texas swagger permeates every page.’

Actually it gives every indication of being ghostwritten, and there was never much ‘low-key’ about George W. Bush.

As with Decision Points (2010), the ghost is Chris Michel, who came by his folksiness via California and Yale, where he was a friend of Bush’s daughter Barbara before joining the White House speechwriting team in 2003 and rising through the ranks during the lame duck years. This time around the intended audience seems to be 11-year-olds of all ages. In the acknowledgments Bush calls Michel--or maybe Michel calls himself--‘one of the great minds in our country’, though he’s not averse to dangling a participle here and there.

His Bush narrator lacks the flair for malapropism and syntax mangling of the unscripted president. There are plenty of biblical quotations but no ‘evildoers’. Missing as well is the strained rhetoric of the solemn first-term teleprompter reader. ‘Terrorist attacks can shake the foundations of our biggest buildings, but they cannot touch the foundation of America,’ he said from the Oval Office on the night of 11 September 2001. ‘These acts shatter steel, but they cannot dent the steel of American resolve.’ Is that chiasmus?

The ‘yo, Blair’ voice is gone, but there’s something of the Bush style of saying you’re doing the opposite of what you’re really doing. ‘He never complained. Self-pity is not in George Bush’s DNA,’ we read on the first page. We’re also told that Dad never brags. What follows is a litany of boasts and grievances. The first string of feats: the Phi Beta Kappa key and star turn on the baseball team at Yale and the stint as a fighter pilot in the Second World War. His crash in the Pacific brought him dangerously close to being captured by the Japanese, who, like Jr’s administration, practised torture--the charge of cannibalism is added to show there’s a difference. From there Dad’s exploits tend to mix ceaseless ‘hard work’ with family bankrolling and lucky political breaks (a first Congressional win in a new Houston district; a second race unopposed; deployment as the resident ‘worrywart’ in the Nixon and Ford administrations; Reagan picking him as a running mate in 1980 to avoid being pushed by the party into standing with Ford as an effective co-president. As president, Dad won the Cold War: he’s a second Churchill.

The grievances take in:

Nixon, for the ‘putrid swamp’ of Watergate;
Reagan, for his theatrical upstaging of Bush in a 1980 debate in New Hampshire;
Dan Rather, the presenter who pursued a vendetta against both Dad and Jr (and lost his job the second time around);
Patrick Buchanan, whose demagoguery in the 1992 primaries distracted the homophobic, sexist and racist elements of the GOP base;
Ross Perot, an old friend whose conspiracy theories caused him to turn on Bush and tilted the 1992 election to Clinton;
Saddam Hussein; and
Nancy Reagan, who never in eight years invited Mother for a proper tour of the White House.

‘Beyond his father’s well-known résumé,’ Baker writes in his review, ‘the book offers a sense of the toll a public life takes on a family.’

That’s one way to read it. You also get a sense of the toll one family has exacted on America and the world. Other than the death of Jr’s sister Robin from childhood leukaemia in 1953, the Bushes seem to have suffered little that wasn’t cushioned by their money and power. When Jimmy Carter let Dad go as CIA director, ‘my father didn’t like the idea of cashing in on his government service, but he had always been interested in the business world.’ He made enough sitting on corporate boards (finance, oil, pharmaceuticals) before his 1980 presidential run to keep the Kennebunkport compound in family hands.

Later, Dad, with scant irony, calls the post-presidential paid speaking circuit ‘white-collar crime’. Many geopolitical events (Iraq’s invasion of Kuwait; the US invasion of Panama, referred to as an ‘island’; the 11 September attacks) have the inconvenient effect of spoiling a family vacation, putting off a family dinner, or interrupting a game of wallyball, the version of volleyball Jr liked to play with the Marines in the Camp David racquetball court.

His days painting are now troubled by the rise of Islamic State, which you could call his one success at nation-building.

Liveblogging World War I: December 2, 1914: Karl Liebknecht

Karl Liebknecht:
The Future Belongs to the People (Reichstag Meeting, December 2, 1914, and Liebknecht's Document Explaining Why He Voted "No"):

AT the second War Session of the Reichstag, Dec. 2, 1914, Karl Liebknecht not only voted against the War Budget – the only member of the Reichstag so to vote – but also handed in an explanation of his vote, which the President of the Reichstag refused to allow to be read, nor was it printed in the Parliamentary report. The President banned it on the pretext that it would entail calls to order. The document was sent to the German Press, but not one paper published it.

The full text of the protest was received by way of Switzerland. It runs as follows:

My vote against the War Credit Bill of to-day is based on the following considerations. This War, desired by none of the people concerned, has not broken out in behalf of the welfare of the German people or any other. It is an Imperialist War, a war over important territories of exploitation for capitalists and financiers. From the point of view of rivalry in armaments, it is a war provoked by the German and Austrian war parties together, in the obscurity of semi-feudalism and of secret diplomacy, to gain an advantage over their opponents. At the same time the war is a Bonapartist effort to disrupt and split the growing movement of the working class.

The German cry: `Against Czarism!' is invented for the occasion – just as the present British and French watchwords are invented – to exploit the noblest inclinations and the revolutionary traditions and ideals of the people in stirring up hatred of other peoples.

Germany, the accomplice of Czarism, the model of reaction until this very day, has no standing as the liberator of the peoples. The liberation of both the Russian and the German people must be their own work.

The war is no war of German defense. Its historical basis and its course at the start make unacceptable the pretense of the capitalist government that the purpose for which it demands credits is the defense of the Fatherland.

A speedy peace, a peace without conquests, this is what we must demand. Every effort in this direction must be supported. Only by strengthening jointly and continuously the currents in all the belligerent countries which have such a peace as their object can this bloody slaughter be brought to an end. 'Only a peace based upon the international solidarity of the working class and on the liberty of all the peoples can be a lasting peace. Therefore, it is the duty of the proletariats of all countries to carry on during the war a common Socialistic work in favor of peace.

I support the relief credits with this reservation: I vote willingly for everything which may relieve the hard fate of our brothers on the battlefield as well as that of the wounded and sick, for whom I feel the deepest compassion. But as a protest against the war, against those who are responsible for it and who have caused it, against those who direct it, against the capitalist purposes for which it is being used, against plans of annexation, against the violation of the neutrality of Belgium and Luxemburg, against unlimited rule of martial law, against the total oblivion of social and political duties of which the Government and classes are still guilty, I vote against the war credits demanded.

The Cato Institute's Brink Lindsey Is Running an Economic Growth Conference This Week: The Honest Broker for the Week of November 21, 2014

Over at Equitable Growth: RE: The Future of U.S. Economic Growth & Reviving Economic Growth: A Cato Online Forum

Some questions for the authors of the contributions that struck me as the most interesting...

First Question: Why has nominal GDP targeting not already swept the economics community? It really ought to have. Second Question: I believe in nominal GDP targeting--especially if coupled with some version of "social credit" at or near the zero lower bound. But a look back at the history of ideas about a proper "neutral" monetary policy--Newton’s fixed price of gold, Hayek’s fixed nominal GDP level, Fisher’s fixed price-level commodity basket, Friedman’s stable M2 growth rate, the NAIRU targeting of the 1970s, Bernanke’s inflation-targeting—leads immediately to the conclusion that anybody who claims to have uncovered the Philosopher’s Stone here is a madman. How can you reassure me that I (and you) are not mad?

Scott Sumner:
More Bang for the Buck: A Surprisingly Cost-Effective Way to Boost Growth:
"I would certainly not claim that monetary policy is the most important determinant...

...of the long-run growth rate in the economy.... But it does offer one of the cheapest ways of boosting growth. Unlike fiscal programs such as infrastructure, there is virtually no cost to improving monetary policy.... Elsewhere (2014) I’ve argued that a policy of nominal GDP targeting would smooth out the business cycle and undercut many of the arguments for counterproductive policies.... We need to convince other economists that nominal GDP targeting is the way to go. Once we do so, the Fed will follow the consensus. READ MOAR

Back in the first Clinton administration, the EITC for childless workers was one of the things that dropped out of the 1993 budget given the decision that we had to hit our $500 billion five-year deficit reduction score and the defection of the oil patch Democratic senators over the BTU tax. Nobody since has wanted to put it back on the table. Why not?

Michael Strain:
Getting back to Work:
"Tt is a safe bet that one reason fewer men are working...

...is that real wages for male workers without a college degree have been stagnant or falling for decades. So my second policy suggestion is to expand the Earned Income Tax Credit (EITC) for childless workers, many of whom are low-income men. The EITC is a federal earnings subsidy: if you work, and if you earn less than a certain amount, then the government will supplement your earnings with a transfer payment. The EITC offers very little support for childless workers, with a maximum credit of only about five-hundred dollars. This amount should be significantly expanded, as both President Obama and Rep. Paul Ryan have suggested. Previous expansions of the EITC have lifted millions out of poverty, and are designed to incentivize nonparticipants to return to the workforce. When they do, everyone wins--the economy has more workers and can produce more goods and services, and the new participants can earn their own success in the labor market, leading flourishing lives that include the dignity only work can provide.

: The Affordable Care Act took at $800 billion ten-year whack at Medicare cost growth, included every administrative and organizational reform David Cutler could think of that might increase incentives for efficient delivery of care, made it much easier for insurance companies to offer and for individuals to purchase high-deductible and high-copay plans, and--in the Cadillac Tax--started a process that Peter Orszag and Christina Romer dearly hope will produce a very substantial cutback in the tax preference for employer-sponsored health insurance. Yet you are not out there saying: we need to build on the cost-containment and efficiency-enhancing aspects of ObamaCare. Why not?

Jeff Miron:
Curtailing Subsidies for Health Insurance:
"The U.S. has two paths to avoid the fiscal crisis...

...implied by current health insurance subsidies. The bigger government approach is to impose more restrictive price and quantity controls in Medicare and Obamacare.... The smaller government approach is to scale back Medicare and Obamacare. The most aggressive ‘reform’ would eliminate any federal role in subsidizing health insurance, leaving such policies to the states. Since the federal tax burden would fall dramatically, states could more easily raise taxes to finance these programs.... A less aggressive ‘reform’ is higher deductibles and co-pays in Medicare and Obamacare...

: How much of the efficiency gains from moving to a consumption tax come from the fact that it is also a lump-sum tax on current wealthholders? It taxes not just the income from their capital, but the capital itself as it has spent. Is this low-hanging fruit because this is a credible way of taxing existing wealthholders once while promising never to do it again? And is this in fact a credible way to do this?

Alan Viard:
Move to a Progressive Consumption Tax:
"As mentioned above, consumption taxation...

...does not penalize saving. Replacing income taxation with consumption taxation would therefore be beneficial.... The greatest gains could be achieved by replacing the entire income tax system (the individual and corporate income taxes, the unearned income Medicare contribution, and the estate and gift tax) with a consumption tax. For distributional reasons, though, the consumption tax would need to be progressive, rather than a regressive tax like the VAT....Households would report their income on annual tax returns, but would then claim a full deduction for all saving and add back in any dissaving.

: The entertainment industry likes copyrights. But the high-tech industry does not like patent trolls. I can understand--given the Democratic Party's dependence for its elite fund-raising on Hollywood, the trial lawyers, the traditionally-Jewish investment banks, and Silicon Valley--why causes like copyright reform and tort reform have so little traction within the set of Democratic office-holders. But what, in your view, has gone wrong with patent reform? Why hasn't patent reform low-hanging bipartisan fruit?

Ramesh Ponnuru:
Taxes, Patents, and Money:
"My top priority in reforming business taxation...

...would be to allow companies to write off the full cost of an investment in the year it incurred the expense, while scaling back the tax break for corporate interest payments.... Low-quality patents on software and business methods appear to have generated a lot of rent-seeking litigation.... The Fed [should] adopt--or be instructed by Congress to adopt--a target path for nominal spending...

As things are, our small-business owners are an exploited class in America today. Overoptimistic, they work long hours for highly variable and relatively low average incomes and in the process provide a lot of opportunities for employment to those they hire. Minimizing additional regulatory burdens on this class seems a good thing. Yet I am finding it hard to see how to craft a paid leave program in a way that does this. Might it not be better to focus on how to help people reenter employment when they return from leave?

Heather Boushey:
To Grow Our Economy, Start with Paid Leave: "First, our proposed paid leave program...

...like any social insurance program, should be available to all workers, including small business employees and the self-employed. Excluding a certain group from taking leave only exacerbates the gap between those who provide care and those who do not. Second, eligibility should be tied to lifetime work history rather than current employment or job tenure. A paid leave program should follow the model of other social insurance programs, such as Social Security Disability Insurance, which bases eligibility on employment history and payment into the system. Third, a national paid leave program should provide a reasonable amount of leave to all workers. Policymakers can follow the lead of the Family and Medical Leave Act, which provides 12 weeks of leave, or 60 workdays, per year. Fourth, paid leave salaries need to be generous enough so workers, especially low-wage workers, won’t jeopardize their economic security by taking leave. We can follow what has worked at the state level. Policymakers can set benefit levels at two-thirds of a worker’s weekly average wage as in New Jersey, and cap them up to a certain amount, as in California.

: How much of this rent-seeking can be addressed at the federal level, and how much requires fifty--or a hundred--state-level think tanks willing to make the case for efficiency and enterprise? And why, in an era where unions get little political respect and have little ability to utilize the powerful protections provided by the NLRA, have those seeking a rent wedge via occupational licensing done so well?

Stephen Teles:
Restrain Regressive Rent-Seeking:
"We often talk about the last third of a century as an era of deregulation....

...But the most important market rigidities that have been eliminated have been those that protected those from the middle class on down. In fact, the great paradox of the last third of a century is that we have actually had an explosion of regulation in this ‘supposedly deregulatory’ era... regulation that has the effect of redistributing, sometimes dramatically, upward.... Intellectual property... occupational licensing... the financial sector.... A focus on rent-seeking allows us to look at the American inequality problem with a different lens....

The image of the U.S. as a free-market paradise is hard to square with the presence in the top income strata of people like car dealers (protected by regulations against the consolidation of car sales), doctors (protected by medical licensing and extensive educational requirements), lawyers (with a limited supply of lawyers and a government that produces outsized demand for their services), government contractors (including private prison managers, defense contractors, for-profit colleges and others whose almost exclusive dependence on government revenue raises question about whether they are ‘private’ in any meaningful sense), and property developers (who in many urban areas can exploit government-constrained ability to build—which drives up prices — and political connections to generate oversized profits). Add in finance, licensed occupations, and sectors with lots of intellectual property, and you’re looking at a sizeable chunk of the 1 percent....

Putting a dent in rent seeking... requires that someone be willing to subsidize ‘third party’ political activity, and for good or ill that must start with deep-pocketed donors willing to use their money to compensate for the imbalance of organization and attention that is the lifeblood of rents.... It may be impossible to organize a broad, deeply mobilized grassroots coalition against upward-redistributing rent seeking. But in most cases, equaling the manpower and resources of the rent-seekers isn’t necessary--just making sure that there is someone on the other side can make a big difference...

What are these local-area "institutional reforms" to overcome NIMBYism? In California, I know that every local elected official curses the Jarvis-Gann Proposition 13 as preventing them from recouping enough via property tax revenue to offset the costs of providing services to a new development, thus changing local governmental officials from reliable boosters for their town to grinches suspicious of every project. Are we looking for a federal government carrot to allocate funds county-by-county based on population growth? Or what?

Ryan Avent:
How Land-Use Restrictions Block Growth:
"infrastructure alone will not solve the problem...

...Instead, metropolitan areas may need institutional reforms that better balance the economic interests of the metropolitan area (and the country as a whole) with the interests and preferences of those living in neighborhoods that are likely to be affected by new development. When land-use decisions are made at a hyper-local level--giving local councilmembers or commissions extensive influence over which projects are approved, or focusing negotiation between residents and developers at the street level rather than the metropolitan level--the result will typically be far too little development. Those living immediately around a project enjoy some of its benefits but bear nearly all of its costs, in terms of disruption and congestion; they are therefore highly motivated to block projects and can succeed when local institutions enable them.

I find that 15% licensing premium huge when I consider that it applies to a great many occupations in which licensing requirements are minimally burdensome--little more than what is called for in order to learn how to do the job. How is it that licensing requirements that do not look burdensome prima facie appear to be substantial burdens and restrictions on entry in fact?

Morris Kleiner:
Our Guild-Ridden Labor Market | Cato Institute:
"The number of persons in licensed professions in the U.S....

...has grown from around 5 percent in the early 1950s to almost 29 percent in 2009. More than 800 occupations are licensed in at least one state (Kleiner and Krueger, 2013). However, my research with Princeton economist Alan Krueger, former head of President Obama’s Council of Economic Advisers shows that licensing raises wages by about 15 percent even when controlling for human capital variables such as age, education, and other labor market characteristics. This is largely due to the ability of regulated professions working through state legislators and regulatory boards to limit the supply of practitioners and eventually drive up costs to consumers and some perception that licensing enhances the quality of the service.

I have always found the argument of Naomi Cahn and June Carbone's Red Families, Blue Families convincing here. Four big changes have hit American families over the past two generations: effective fertility control, the post-baby boom reduction in desired family size, the end of economic patriarchy in the form of solid career ladders for blue-collar men, and the opening-up of workforce opportunities to women. In this context, those embedded in a cultural matrix that aggressively encourages women to take control of their fertility, postpone childbearing and marriage until their late 20s or longer, and look for an equal partner find a relatively good fit. Those embedded in an alternative cultural matrix find a much worse fit--a cultural matrix that puts forth an eighteen year-old unattached single mother as an abstinence spokesperson, writes about Sandra Fluke as "ex-crazed co-eds going broke buying birth control, student tells Pelosi hearing touting freebie mandate", and loads economic expectations of earning power that cannot be met onto young not-well-educated men places people under immense stress. Isn't the answer to your Gordian knot of issues going to be that we need to up value the "Blue State" culture that has emerged in our era of the pill, feminism, and globalization, and downvalue "Red State" culture?

Don Peck:
Shoring up the Middle Class:
"I’d like to address... the cultural, economic, and familial dysfunction...

...that is steadily climbing from the lowest socio-economic classes into the broad American middle class.... As the sociologist W. Brad Wilcox writes, ‘the family lives of today’s moderately educated Americans increasingly resemble those of high-school dropouts, too often burdened by financial stress, partner conflict, single parenting, and troubled children.’... Among moderately educated women, 44 percent of all births occurred outside marriage... families of high-school graduates coming to look like those of high-school dropouts, rather than those of college graduates... the percentage of 14-year-old girls living with both their mother and father; the percentage of adolescents wanting to attend college ‘very much’; the percentage of adolescents who say they’d be embarrassed if they got (or got someone) pregnant; the percentage of never-married young adults using birth control all the time. Wilcox is hardly alone in noticing this trend. It has been documented, exhaustively, by scholars across the ideological spectrum...

As you know, cap-and-trade looks like a carbon tax coupled with a substantial redistribution of the present value of a substantial chunk of the future carbon tax revenues to current energy producers. In a world in which it is reasonable to expect the next two generations to see disruptive innovations in energy, this redistribution enriches those who hold current market share and imposes a tax on future more-nimble more-innovative entrants and competitors. From a political economy standpoint, therefore, cap-and-trade--the McCain 2008 environmental policy--ought to have been irrestible. Yet it was resisted, very strongly. Why?

Donald Marron:
Bigger, Cleaner, and More Efficient: A Carbon-Corporate Tax Swap | Cato Institute:
"The United States could reduce its contribution to global climate change...

...and increase domestic prosperity by taxing emissions of carbon dioxide and other greenhouse gases and using the resulting revenue to reduce corporate income taxes. Such a carbon-corporate tax swap would give us a bigger, cleaner economy and avoid any need for more costly efforts to reduce emissions...

: Haven't we gotten foreign policy right since World War II, more or less? Haven't we created a world in which everyone save for the oligarchs of Muscovy and the princes and princelings of China wishes that their country was more like ours, and hopes that their grandchildren will have the option to move here if they want? What could we have done better over the past fifty years--aside from a lamentable tendency to think that right-dictatorships are more likely to evolve into democracies than left-dictatorships, that our soldiers can train "third forces" that will stand up on battlefields, and that we can intervene to both make people, in Woodrow Wilson's words, "elect good men" and to make those we imagine are democracy-minded strongmen actually hold fair and honest elections?

Tyler Cowen:
The Primacy of Foreign Policy:
"I’m not going to try to solve these conundrums...

...iI’ll simply put it this way: the single most important thing we can do to boost long-run American growth is to get foreign policy right. Very literally our lives, and the lives of many others, depend on it. And that means the economists aren’t nearly as important as they like to think they are.

2973 words

Robert Waldmann on the Engines of Growth: Live from Crows Coffee

It is just not credible for me to highlight a comment that starts "this is an unusually excellent post" as a DeLong Smackdown, is it? Alas, because it is one, a good one...

Robert Waldmann:
Waving a Magic Wand for Economic Growth:
"I think this is an unusually excellent post...

...Also the question is a very good question (and your concern about the power of the wand a good concern).

@Ezra Abrams the question was specifically about increasing "growth".... There is evidence that higher taxes on the top 0.1% would cause higher GDP growth https://ideas.repec.org/p/rtv/ceisrp/281.html but it isn't very strong....

I find it interesting that the word "equipment" doesn't appear on your list. I wonder why.

I agree that education seems to be key to growth. I would have put universal pre-k somewhere on the list. That, I think, is relatively doable for one thing, and the evidence for very high social returns is quite strong.

Also post-12 education. I'd tend to guess that Pell grants are money well spent. For one thing, people who think they can't afford college also think that their K-12 performance (I mean grades) doesn't matter. I think more public financing of higher education would mean selection more on [your] ability than dad's (and now mom's) income, and also change incentives for high school students (or rather create some incentives for the many high school students who now know they just have to attend to study).

On a completely different note, I think there is a lot of growth to be had based on risk premia. with the current system, high returns are required of projects with high idiosyncratic risk. This is not in the representative consumer's interests. I think that growth would be increased at far less than zero cost if the Federal Goverment were to buy 10% of common stock (not chosen, 10% of the shares of every listed firm).

Here I note two bits of evidence

Singapore is very rich. How did that happen ?
the US Federal Government made huge gigantic profits saving the financial system even though it bought risky assets (aspecially Fannie and Freddie shares) at far above market prices.

I'd also add that the Wall Street as casino finance is a burden on growth--here especially because it employs smart people who spend their time betting against each other. During the high-growth period finance was highly regulated dull and boring. I don't think that is a coincidence.

I think DARPA is one key engine of growth. It seems to me that publicly financed (or subsidized) research is money well spent.

Finally, I still believe in equipment investment and equipment investment tax credits. Also the R&D tax credit. I don't care if Republicans agree with me, the policies make sense.

On Paul Krugman and His "Notes on the Floating Crap Game": Live from Crows Coffee

Paul Krugman appears to be suffering a crisis of confidence with respect to the value of the economics Academic "meritocracy" he surveys from his position at its peak:

Paul Krugman:
Notes on the Floating Crap Game (Economics Inside Baseball):
"Reading Fourcade et al....

...may explain one of the things that has puzzled me in the disputes over macro policy--namely, the seemingly unquenchable certainty among some of the freshwater guys that Keynesians are stupid. Again and again...freshwater macroeconomists declare that New [and old] Keynesians... don’t get some basic point... accounting identities [among others: Fama, Cochrane]... Ricardian equivalence [among others: Lucas, Cochrane, Lin, Prescott, Zingales, Boldrin]... the Euler condition [this seems to be Cochrane alone] (plus)... the Fisher equation [among others: Kocherlakota (but years ago), Williamson, Cochrane, Schmidt-Grohe, Uribe, Cowen, Andolfatto].

Each time it has turned out that the Keynesians understood the concepts perfectly well, and that it was the anti-Keynesians, in their haste to cry ‘Gotcha!’, who were making elementary logical errors or suffering failures of reading comprehension. You would think that at some point they’d catch on.... If your worldview says that Stan Fischer and Olivier Blanchard must be dumb, you have a problem. But they never do seem to learn. Why?... [Perhaps it is] economists’ reputation-based hierarchy interacting with the insularity of the freshwater macro school. People in that camp tuned out alternative views more than 30 years ago, so all they observe is their own repetitional universe....

The structure of academic economics. It’s hierarchical.... Are the reputations deserved? I used to think so. Hey, it worked for me. But the macro wars have been revealing: we’ve seen quite a few highly successful academics, with lots of widely cited papers, prove remarkably dense... people with big reputations who can push equations around but don’t seem to have any sense of what the equations mean. And they don’t even seem to know what they don’t know.... I guess I hope that these things are outliers. But if you feel cynical about economics after reading Fourcade, you may be right.

I find myself both less depressed about economics and more depressed about political economy than Paul Krugman is.

I find myself less depressed about economics because it seemed to me from 1980 on that both new-classical and real-business-cycle macro were unsustainable bubbles, largely for the reasons given by Ken Rogoff in his 2001 Mundell-Fleming Lecture:

At the time Rudi [Dorbusch] was working on his [overshooting] paper, the concept of sticky prices was under severe attack. In his elegant formalization of the Phelps island model, Lucas (1973) suggested one could understand the real effects of monetary policy without any appeal to Keynesian nominal rigidities, and by 1975 Lucas had many influential followers in Sargent, Barro, and others. The Chicago-Minnesota school maintained that sticky prices were nonsense, and continued to advance this view for at least another 15 years.

It was the dominant view and academic macroeconomics. Certainly there was a long period in which the assumption of sticky prices was a recipe for instant rejection that many leading journals. Despite the religious conviction among macroeconomic theorists the prices cannot be sticky, the Dornbusch model remained compelling to most practical international macroeconomists. This convergence of use led to a long rift between macroeconomics and much of mainstream international finance. Of course, today the pendulum has swung back entirely, and there is a broad consensus across schools of thought that some form of price rigidity is absolutely necessary to explain real-world data... Rotemberg and Woodford (1997), Woodford (2002).... Phelps-Lucas islands paradigm for monetary , for now, a footnote (albeit a very clever one) in the history of monetary theory.

There are more than a few of us in my generation of international economist who still bear the scars of not being able to publish the key price papers during the years of new classical repression. I still remember a mid-1980s breakfast with a talented young macroeconomic theorist from Barcelona who was of the Chicago-Minnesota school. He was a firm believer in the flexible-price Lucas islands model and spent much of the meal ranting and raving about the inadequacy of the Dornbusch model:

What garbage! Who still writes down models with sticky prices and wages! There are no microfoundation. Why do international economists think that such a model could have any practical relevance? It's just ridiculous!

Eventually the conversation turns and I ask:

So, how are you doing at recruiting? Your university has made a lot of changes.

The theorist answers without hesitation:

Oh, it is very hard for Spanish universities to recruit from the rest of the world right now. With the recent depreciation of the exchange rate, our salaries [that remained fixed in nominal terms] have become totally uncompetitive.

Such was life.

As I see it, Lucas's initial bet was that informational imperfections and the consequent confusion between nominal and real price changes where the drivers of the short-run accelerationist Phillips curve, and that credible monetary policies that eliminated any such confusion would stabilize output and employment. Milton Friedman warned at the time that this was silly--or, perhaps, that this was silly if one did not understand that the inflation "expectations" relevant to next year's price level were a long distributed lag of inflation expectations extending at least a generation into the past. And as model after model failed Lucas, Prescott, and their epigones doubled down, calling for better microfoundations and thinking up new statistical reasons why the correlations in the data that suggested that their research program was degenerating could be explained away.

Where Rogoff--and Krugman, and Blanchard--were wrong, of course, was in assuming that by the end of the 1990s the fever-bubble had spent itself. A little attention to graduate reading lists might have kept them from this misconception--as Matthew Shapiro would tend to say at least every other lunch: "You know, we assign their stuff in our courses, but they do not assign our stuff in their courses." But I am getting an increasing sense that the non-macroeconomists even in the most Chicago-oriented of departments are increasingly unhappy with and unwilling to hire more macroeconomists who cannot teach anything relevant to the world of the past decade.

My hope (and my expectation when I am optimistic) is that slots that have been earmarked for Chicago-Minnesota macroeconomists will be used, instead, to hire international macroeconomists and institutional growth economists.

However, the big problem, of course, is not that there are a bunch of people from Chicago-Minnesota claiming to be macroeconomists and talking nonsense--the big problem is not the Michele Boldrins and the John Cochranes and the Eugene Famas and the Niall Fergusons and the David Levines and the Robert Lucases and the Edward Prescotts and the Stephen Willliamsons and the Luigi Zingaleses and the others who either never learned or have forgotten how to mark their beliefs to market, and whose response to getting a prediction wrong is to try to add another epicycle to save the appearances.

The big problem, of course, is the freezing-up of economic policy. That is due to the dominance at so many levels in so many communities of two currents of thought. The first is, as Barack Obama put it at the very start of 2010:

Families across the country are tightening their belts and making tough decisions. The federal government should do the same. So tonight, I’m proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year. Starting in 2011, we are prepared to freeze government spending for three years.... Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will...

The second is the belief that even if the Wicksellian nominal natural interest rate that balances total spending with real potential output times the current level is zero, it is nevertheless for some vaguely-described financial-stability reason undesirable to keep interest rates that low unless necessary to avoid another recession. As Ben Bernanke put it:

The first risk is that rates will remain low, and the second is that they will not.... In an environment of persistently low returns, incentives may grow for some investors to engage in an unsafe 'reach for yield'.... Alternatively... a risk that... rates will rise sharply... imposing capital losses.... The two risks may very well be mutually reinforcing.... [Bu] premature rate increases would carry a high risk of short-circuiting the recovery... and the economies of the major industrial countries are still in the recovery phase...

Now neither of these beliefs comes out of Chicago-Minnesota macroeconomics at all. Chicago-Minnesota macroeconomics does not see financial-stability risk at all. And Chicago-Minnesota macroeconomics has nothing to say about the level of the national debt other than that tax rates should be smoothed and the government right-sized.

Paul Krugman and others sometimes lament that if only the Lucases and the Prescotts had stayed out of the way, sensible macroeconomists would have been able to successfully lobby the political system for better policies. I think that is somewhat naïve. But writing down why I think that is somewhat naïve will have to wait for some other day...

Noted for Your Morning Procrastination for December 1, 2014

Over at Equitable Growth--The Equitablog

Over at the Cato Institute: Waving a Magic Wand for Economic Growth
Lawrence Summers on ‘House of Debt’
Paul Krugman: The German Inflation Undershoot: The European Outlier
Peter Hart: NYT Columnist Andrew Ross Sorkin's Faulty Attack on Elizabeth Warren's 'Rage'
Nicholas Bagley: Three Words and the Future of the Affordable Care Act
Ed Luce: Hillary Clinton’s rickety bridge to the White House

Plus:

Things to Read on the Morning of December 1, 2014

Must- and Shall-Reads:

Nicholas Lemann: When G.M. Was Google
Ed Luce: Hillary Clinton’s rickety bridge to the White House
Nicholas Bagley: Three Words and the Future of the Affordable Care Act
Paul Krugman: The German Inflation Undershoot: The European Outlier
Peter Hart: NYT Columnist Andrew Ross Sorkin's Faulty Attack on Elizabeth Warren's 'Rage'

And Over Here:

Over at the Cato Institute: Waving a Magic Wand for Economic Growth
Liveblogging World War II: December 1, 1944: The Fronts
Monday Smackdown: Did Anthony Watts Ever Correct His Erroneous Claim That the EPA "Jump[ed] the Shark, Banning – ARGON"?
If Edgar Allen Poe Had Written Thomas the Tank Engine: Live from the Roasterie
Over at Equitable Growth: Things I Should Have Written About When They Were Published: Lawrence Summers on ‘House of Debt’
Comments on Stephanie Aaronson: Labor Force Participations: Recent Developments and Future Prospects
I Am Fortune's Fool...

Ed Luce:
Hillary Clinton’s rickety bridge to the White House:
"Voters lack a compelling reason to embrace Democrats, as opposed to simply rejecting Republicans.... Without a credible economic plan, the US left risks being little more than a rainbow coalition. This is the danger facing Mrs Clinton’s candidacy. It is possible--perhaps even likely--that Republicans will select a nominee who has alienated so many Americans that he will be unable to compete in a general election. It is also plausible that Mrs Clinton will appeal to enough women, Hispanics and others to ensure her electoral maths are prohibitive. That is the working theory. Unless Mrs Clinton can find a positive story to engage America’s middle classes it is the only one that is likely to work in practice.... Mrs Clinton’s network of donors are comfortable with social liberalism. The bulk of her money will come from places like Wall Street and Silicon Valley, which are either neutral or supportive on social issues. Their focus is on lower taxes and fewer regulations. Mrs Clinton’s challenge will be to square her donors’ priorities with America’s increasingly apolitical young voter.... Those who are unemployed want jobs. Those who have jobs want a pay rise. All that most will remember is eight lean years under President Barack Obama.... Mrs Clinton will need new ideas and new faces. Who they will be--and what they will advise--is anyone’s guess.... In the absence of new ones, Mrs Clinton’s bridge to the White House looks rickety."

Nicholas Bagley:
Three Words and the Future of the Affordable Care Act:
"Adler and Cannon have offered a strained interpretation of the ACA that, if accepted, would make a hash of other provisions... and undermine its stated purpose.... The more natural reading... [is that] the “by the State” language just reflects Congress’s assumption, unchallenged at the time, that the states would establish their own exchanges. But even if you think that Adler and Cannon’s claim is plausible... the contrary interpretation offered by the government is at least reasonable. That brings me to the aspect of their argument that troubles me the most: their unyielding conviction that they’ve identified the only possible construction of the ACA. Nowhere do they so much as acknowledge the possibility that maybe, just maybe, they’re wrong. That’s because they can’t admit to doubt. Because of the deference extended to agency interpretation, doubt means they lose. But their unwillingness even to acknowledge ambiguity reflects an important difference between legal advocacy and neutral interpretation.... The courts would violate their obligation of fidelity in statutory construction if they mistook [their legal] ingenuity for genuine obeisance to congressional will. The latest challenge to the ACA is political activism masquerading as statutory restraint."

Paul Krugman:
The German Inflation Undershoot: The European Outlier:
"The point is a simple but important one: at this point any European imbalances associated with the surge in capital flows to the periphery after the formation of the euro have been worked off via extremely painful and costly disinflation.... From 1999 to the present, most of Europe has had cost growth and inflation just about consistent with the ECB’s long-standing just-under-2 percent inflation target. There’s just one big outlier.... The European imbalance problem is a German problem, caused by Germany’s persistent failure to have wage and price increases in line with what the euro requires. This German undervaluation is in turn exporting deflation to the rest of Europe. By contrast, France, Spain, and even Italy have been playing by the rules."

Peter Hart:
NYT Columnist Andrew Ross Sorkin's Faulty Attack on Elizabeth Warren's 'Rage':
"Not so fast, says Sorkin–this is no normal inversion: 'While the merger is technically an inversion, it isn't comparable to so many of the cynically constructed deals that were done this year simply to reduce taxes.'
That's what Burger King says–though Stephen Shay... says, 'I would be surprised if in five years' time, their tax rate does not come down reasonably dramatically.'... This is the crux of Sorkin's argument that Warren 'is, to put it politely, mistaken.' She calls this a tax inversion, and it's not--or actually it is, since it's 'technically an inversion.' Is that clear enough for you?... Sorkin admits that Warren could have had a better argument if she wasn't so blinded by her rage: 'It is true that Mr. Weiss doesn't have a lot of experience in the regulatory arena... will be the beneficiary of a policy at Lazard that vests his unvested shares... by taking a government job.... Ms. Warren might be more persuasive if she focused on those issues.' Good point: Warren should have focused on his lack of regulatory experience. Oh wait, she did.... 'That raises the first issue. Weiss has spent most of his career working on international transactions–from 2001 to 2009 he lived and worked in Paris–and now he's being asked to run domestic finance... oversee consumer protection and domestic regulatory functions at the Treasury.' Free tip for Andrew Ross Sorkin: Don't say someone should have emphasized a point they in fact raised as 'the first issue.' It makes it seem like you didn't read the article you're critiquing."

Should Be Aware of:

"The reason ESPN reporter Keith Law got suspended last week was stupid: He defended the theory of evolution on Twitter, kindly and calmly, to his co-worker, creationist Curt Schilling, and ESPN punished him for it. The reason he’s probably going to be suspended again? Sheer awesomeness."
Nick Butler:
Prepare for a long-term fall in energy prices

 

Wolfgang Münchau:
The Juncker fund will not revive the eurozone:
"As a financial instrument Jean-Claude Juncker’s new investment fund is very clever. As an economic measure it will not work.... It reminds me of a product that was briefly popular in the credit bubble of the past decade: a synthetic collateralised debt obligation... an attempt to get from nothing to something.
I have no problems with structural finance if it can be applied to a useful social purpose, as in the case of Mr Juncker’s fund. My objections are practical.... The commission starts off with €8bn... as collateral for a guarantee of €16bn.... The European Investment Bank adds another €5bn... use the €21bn to raise some €60bn in cash by issuing bonds.... It could then use the €60bn to co-finance €315bn in investments from the private sector.... Mr Juncker wants to encourage €300bn in investment over three years, which translates to roughly 0.8 per cent of the EU’s gross domestic product per year. This would make a difference. But even if he manages to achieve this headline number, it is not clear that he will have prompted new investments.... Mr Juncker’s fund could turn out to be both a bureaucratic triumph, and an economic non-event.... The heavy lifting will have to come from the European Central Bank... a programme of quantitative easing will have to be drawn up that is quite different in spirit from Mr Juncker’s €300bn programme. It will have to go on for as long as it takes, and it will have to involve real money upfront, and no guarantees, and no tricks. The eurozone needs a truly grown-up response if growth is to be revived."

John Hussman:
Hard-Won Lessons and the Bird in the Hand:
"The tendency [today] for extremely overvalued, overbought, overbullish syndromes to extend much further than in prior market cycles, without material correction, as a result of Fed-induced yield seeking by speculators with little regard for valuation.... In prior market cycles, extreme overvalued, overbought, overbullish conditions had almost invariably resulted in steep and abrupt market declines in relatively short order.... I hear that I'm a polarizing figure in internet chat circles. While I write a lot of market commentary, I rarely read comments on social media, following Neil Stephenson’s rule that 'arguing with anonymous strangers on the Internet is a sucker’s game--they turn out to be indistinguishable from self-righteous sixteen-year-olds with infinite free time'.... Given extreme bullish sentiment and the necessity of justifying prices that are so disconnected from historically reliable valuation measures here, it’s also not a surprise that value-conscious, historically-informed views are increasingly polarizing. As George Orwell wrote, 'The further a society drifts from truth, the more it will hate those who speak it.'... The S&P 500 is more than double its historical valuation norms on reliable measures... sentiment is lopsided... dispersion across market internals.... None of those considerations inform us that the U.S. stock market currently presents a desirable opportunity to accept risk.... I know exactly the challenge that Fed-induced yield-seeking has posed to our discipline in recent years.... During the Depression, valuations similar to those of 2008 were still followed by a loss of two-thirds of the stock market’s value to its final low in 1932.... The equity market is now more overvalued than at any point in history outside of the 2000 peak... 115% above reliable historical norms.... Even 3-4 more years of zero short-term interest rates don’t 'justify' more than a 12-16% elevation above historical norms.... We estimate that the S&P 500 is likely to experience zero or negative total returns for the next 8-9 years.... The suppressed Treasury bill yields engineered by the Federal Reserve are likely to outperform stocks over that horizon, with no downside risk.... Wall Street is quite measurably out of its mind.... Yet somehow the awful completion of this cycle will be just as surprising as it was the last two times around.... Honestly, you’ve all gone mad.... I encourage... investors to understand the actual depth of market declines that have been part and parcel of market cycles... 30-50% and occasionally more..."

I Am Fortune's Fool...

How is it that it is not until now that I realize that the Lord Chamberlain, whose men Shakespeare, Burbage, and company were, was Robert Dudley, Earl of Leicester?

Evening Must-Read: Nicholas Bagley: Three Words and the Future of the Affordable Care Act

Nicholas Bagley:
Three Words and the Future of the Affordable Care Act:
"Adler and Cannon have offered a strained interpretation of the ACA that...

...if accepted, would make a hash of other provisions... and undermine its stated purpose.... The more natural reading... [is that] the “by the State” language just reflects Congress’s assumption, unchallenged at the time, that the states would establish their own exchanges. But even if you think that Adler and Cannon’s claim is plausible... the contrary interpretation offered by the government is at least reasonable.

That brings me to the aspect of their argument that troubles me the most: their unyielding conviction that they’ve identified the only possible construction of the ACA. Nowhere do they so much as acknowledge the possibility that maybe, just maybe, they’re wrong. That’s because they can’t admit to doubt. Because of the deference extended to agency interpretation, doubt means they lose.

But their unwillingness even to acknowledge ambiguity reflects an important difference between legal advocacy and neutral interpretation.... The courts would violate their obligation of fidelity in statutory construction if they mistook [their legal] ingenuity for genuine obeisance to congressional will. The latest challenge to the ACA is political activism masquerading as statutory restraint.