J. Bradford DeLong's Blog, page 1132

Hoisted from the Archives from Four Years Ago: What is Happening with Bond Prices?

Hoisted from the Archives from Four Years Ago:

What is Happening with Bond Prices? (Brad DeLong's Grasping Reality...): It is very hard to have a bubble in bonds because there is a date certain at which the principal is repaid. In year nine you cannot delude yourself into thinking that somebody will pay more than face value in year ten. And so in eight it is very hard to delude yourself into thinking that somebody in year nine will delude themselves into thinking that somebody will pay more than face value in year ten.

Nevertheless, Jeremy Siegel and Jeremy Schwartz think that we are in a bond bubble:

The Great American Bond Bubble: If 10-year interest rates, which are now 2.8%, rise to 4% as they did last spring, bondholders will suffer a capital loss more than three times the current [annual] yield. Ten years ago we experienced the biggest bubble in U.S. stock market history.... A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds. Investors, disenchanted with the stock market, have been pouring money into bond funds, and Treasury bonds have been among their favorites.... We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic....

From our perspective, the safest bet for investors looking for income and inflation protection may not be bonds... stocks, particularly stocks paying high dividends, may offer investors a more attractive income and inflation protection than bonds over the coming decade....

Today, the 10 largest dividend payers in the U.S. are AT&T, Exxon Mobil, Chevron, Procter & Gamble, Johnson & Johnson, Verizon Communications, Phillip Morris International, Pfizer, General Electric and Merck. They sport an average dividend yield of 4%, approximately three percentage points above the current yield on 10-year TIPS.... Their average price-earnings ratio, based on 2010 estimated earnings, is 11.7, versus 13 for the S&P 500 Index. Furthermore, their earnings this year (a year that hardly could be considered booming economically) are projected to cover their dividend by more than 2 to 1....

Those who are now crowding into bonds and bond funds are courting disaster.... If over the next year, 10-year interest rates, which are now 2.8%... rise to 4% as they did last spring, the capital loss will be more than three times the current yield. Is there any doubt that interest rates will rise over the next two decades as the baby boomers retire and the enormous government entitlement programs kick into gear?

With future government finances so precarious, private asset accumulation and dividend income must become the major sources of retirement funding. At current interest rates, government bonds will not be the answer...

A bubble--I thought--is when those holding an asset do so because they expect its price to rise more-or-less indefinitely, and such a price rise is impossible. Such a bubble is very prone to rapid collapse when people realize that their expectations are very wrong.

Do holders of U.S. Treasury bonds expect the prices of the assets they own to rise more-or-less indefinitely? No, they do not. They expect their holdings of Treasury bonds to be and to continue to be safe places to park their money, and they expect other asset classes to be risky.

Over time, I think, the fear of other asset collapses will ebb--but this is highly likely to produce a gradual rise in the prices of other asset classes and a gradual fall in Treasury prices, but a gradual fall does not make Treasury bonds unsafe.

Those who hold Treasuries to maturity will get the returns they expect: for holders-to-maturity, Treasury bonds are indeed very safe absent a very unlikely upward leap in inflation.

So I cannot see any possibility of a bubble collapse at the short end of the Treasury market--less than ten years, seven.

But how about the spectrum from seven years on out to thirty? Could there be a sudden large downward movement in Treasury bond prices that would convince holders of Treasuries that they are not safe at all and induce a wave of panicked selling that would look like the collapse of a bubble?

In asset prices, never say never: the only thing you can ever say with absolute certainty is J.P. Morgan's: "they will fluctuate."

But I don't think so. People today buy an on-the-run ten-year Treasury at a yield of 2.64%--the bond with a 2.65% coupon maturing on August 15, 2020 at a price of 100.07. Its price drops tomorrow to 88.96. Do they conclude that their long Treasury position is too risky to hold? Or do they conclude that the Treasury correction has come and gone, and that Treasuries are actually safer than ever?

To argue that there is a Treasury bond bubble going on, you have to believe that such a fall in Treasury bond prices would induce further selling. And I cannot see that--not with the current state of macroeconomic news."

Wow! Was I smart--or just lucky?

Noted for Your Morning Procrastination for October 22, 2014

Over at Equitable Growth--The Equitablog

For Thursday: Josh Bivens, Brad DeLong, Jeff Madrick, Ylan Mui: How Mainstream Economic Thinking Imperils America - Washington Center for Equitable Growth
Morning Must-Read: Richard Mayhew: Keeping It Like the Kaiser - Washington Center for Equitable Growth
Morning Must-Read: Note That Politico Does Not Label Advertisements as Advertisements - Washington Center for Equitable Growth
Morning Must-Read: Charles Steindel: Monetary Policy and Fiscal Policy - Washington Center for Equitable Growth

Plus:

Things to Read on the Morning of October 22, 2014 - Washington Center for Equitable Growth

Must- and Shall-Reads:

Lawrence MacDonald and Jing Cao: The Sudden Rise of Carbon Taxes, 2010–2030
Larry Mishel: Economist: Skills, Tech Gap Can’t Explain Inequality
William C. Dudley: Enhancing Financial Stability by Improving Culture in the Financial Services Industry
Danny Vinik: The Federal Reserve Should Not End Its Quantitative Easing Program
Charles Steindel: For Thursday... How Mainstream Economic Thinking Imperils America
Note That Politico Does Not Label Advertisements as Advertisements: Geoff Morrell: No, BP Didn't Ruin the Gulf
Richard Mayhew: Keeping it like the Kaiser
Noah Smith: Forecasting Is Risky, Especially About the Future

And Over Here:

Did You Know That "Irk" Makes a Synonym of Itself in Rot13?: Live from Crows Coffee (Brad DeLong's Grasping Reality...)
Liveblogging World War II: October 22, 1944: Leyte Gulf: Background (Brad DeLong's Grasping Reality...)
For Thursday: Josh Bivens, Brad DeLong, Jeff Madrick, Ylan Mui: How Mainstream Economic Thinking Imperils America (Brad DeLong's Grasping Reality...)
Liveblogging World War II: October 21, 1944: Douglas MacArthur (Brad DeLong's Grasping Reality...)
Medicaid: Two Years Late, John Kasich Gets Religion: Live from teh Roasterie (Brad DeLong's Grasping Reality...)

Charles Steindel: For Thursday... How Mainstream Economic Thinking Imperils America: "Your comments on how economics should... be constructed are very well-stated (actually making it more of a social science, and less model-juggling. However, it also would change the sort of person going into the field and change the field's criteria for success. Not easy!). One thing... is the optimizing behavior of economic policy analysts. Fiscal policy seems off the table, so macroeconomists dive into unconventional monetary policy, which, one trusts, all know is extremely dicey. Why not more emphasis on yelling from the rooftops that the usual economic fears of expansionary fiscal policy (debt accumulation, waste)are simply off target, and less time worrying about the fine points of 'tapering'? Your Brookings work with Larry shows the analytics of fiscal policy at this juncture very well. Criticizing the critics of expansionary fiscal policy as evil 0.01% oligarchs or mindless racist Tories might make one feel good and righteous but doesn't get anybody anywhere; basic analysis held by what seems everybody but a few denizens of the Booth School shows the economic sense of the policy. The notion of criticizing Christie Romer as in thrall to Milton Friedman is indeed droll in the extreme. I guess to have to see the book to see what his problem is with Olivier."

Note That Politico Does Not Label Advertisements as Advertisements: Geoff Morrell: No, BP Didn't Ruin the Gulf: "What impact did the spill actually have on the Gulf Coast environment?... [10 paragraphs]... Geoff Morrell is senior vice president of U.S. communications and external affairs for BP."

Richard Mayhew: Keeping it like the Kaiser: "The payer provider model has been around US healthcare for a very long time, but the Kaiser twist on it is very wierd and as far as I know, no one else does it quite like Kaiser... a fully integrated payer provider with exclusive usage.... Almost all other non-governmental payer-providers are not exclusive walled gardens that systematically seek to minimize interaction with the entire US healthcare delivery ecosystem.... So what does this difference mean?... I think the Kaiser model allows it to capture and internalize significantly higher percentage of preventive and care coordination benefits than most other integrated payer provider models and far more benefits are captured than segregated payer/provider models. It allows for a common focus and a shared focus on quality and risk minimization as aligning incentives to pay docs to not order a needless test actually makes sense in all scenarios. Other integrated payer providers that are not exclusive walled gardens have the incentive to perform high quality and efficient care on their insured members but wasteful care on patients who are insured by someone else. A Sutter doc who orders an MRI on a non-best practice basis for a Sutter member is costing the company money, but ordering that MRI for an Anthem or United Health insured patient is a a revenue gain. Most providers don’t change their patterns of practice on a patient by patient basis, that means aggregate performance on minimizing needless tests, minimizing preventable care incidents is conflicted with revenue maximization.... The revenue risk is the biggest risk that will stop non-exclusive mostly open payer providers from converting to a Kaiser walled-garden approach.... At least a few payer-providers will install significant gatekeepers and low walls for their network to keep most of their members in and other people out, but the walls won’t be high nor hard to hop over. Kaiser is weird in the American context, and I anticipate it will continue to be an unusual but highly successful implementation of a fairly unique non-governmental model."

Noah Smith: Forecasting Is Risky, Especially About the Future: "I wrote about the people who warned in 2010 that quantitative easing would result in inflation, but who didn't seem to change their beliefs very much after inflation failed to materialize.... Of all the defenses offered by the 2010 inflationistas for the constancy of their views, the most subtle and interesting is the claim that predicting an event is different than predicting the risk of an event.... It is indeed a subtle distinction. In fact, it is several subtle distinctions rolled into one. First, there is the issue of how to trust a forecaster who only forecasts risks.... Ideally, the way you would deal with this is to get the forecaster to make many repeated predictions.... Second, there is the distinction between making a prediction and updating one’s beliefs based on the outcome.... Third, there is the issue of time. What if, in 2027, there is a burst of inflation for no apparent reason? Will the people who predicted inflation as a result of QE in 2010 say ‘See? We told you that Fed balance sheet expansion had to cause inflation sooner or later!’?... Finally, there is the question of what information set someone used when issuing his or her warning. Did the signatories of the 2010 letter think only about the experience of the U.S. in the 1970s when they warned about inflation? Or had they stopped to consider the experience of Japan, whose repeated rounds of QE have never unleashed inflation of more than 1 percent? The fundamental question is this: Suppose there are people out there who are broken records when it comes to inflation. Rain or shine, come what may, they warn of inflation.... Obviously, these warnings would have zero informational content.... Is there some kind of Turing Test for macroeconomic forecasters?... Our tools for identifying unreliable forecasters are rather primitive--a combination of reputation, bluster, excuses, insults and counter-insults. It’s all a bit silly, and it generates a lot of bad feelings all around. But what else can we do?"

Should Be Aware of:

Alan Krueger: A Blog for Teachers
Jesse Singal: Gamergate Should Stop Lying to Itself
Dylan Stableford: How One Doctor [Stella Ameyo Adadevoh] Saved Nigeria from Ebola Catastrophe
Gandalf Is Vaguely Concerned With Your Life Choices...

 

Nancy Cartwright: Evidence for Policy: "To repeat, our assessment of the probability of effectiveness is only as secure as the weakest link in our chain of reasoning to arrive at that probability. We may have to ignore some issues or make heroic assumptions about them. But that should dramatically weaken our degree of confidence in our final assessment. Rigor isn’t contagious from link to link. If you want a relatively secure conclusion coming out, you’d better be careful that each premise is secure going in."

Daniel Davies: Bonus regulation--a terrible idea whose time has come?: "Finally, it appears that the investment banking industry (in Europe at least) has got the kind of regulation it deserves. Which is to say, capricious, wrongheaded, arrogant and systematically destructive. As someone who worked in this industry until about three months ago, all I can say is that I feel for my ex-colleagues, but that this was not a disaster which fell on the industry like a Black Swan from a blue sky--it was more like the kind of injuries that you get if you climb into the lion enclosure at the zoo, and repeatedly kick a sleeping lion up the bum to see if it will wake up..."

Bruce Bartlett: Obama Is a Republican: "I wrote a piece for the New Republic soon afterward about the Obamacon phenomenon--prominent conservatives and Republicans who were openly supporting Obama. Many saw in him a classic conservative temperament: someone who avoided lofty rhetoric, an ambitious agenda, and a Utopian vision that would conflict with human nature, real-world barriers to radical reform, and the American system of government. Among the Obamacons were Ken Duberstein, Ronald Reagan’s chief of staff; Charles Fried, Reagan’s solicitor general; Ken Adelman, director of the Arms Control and Disarmament Agency for Reagan; Jeffrey Hart, longtime senior editor of National Review; Colin Powell, Reagan’s national security adviser and secretary of state for George W. Bush; and Scott McClellan, Bush’s press secretary. There were many others as well.... They were not wrong.... Obama has governed as a moderate conservative—essentially as what used to be called a liberal Republican before all such people disappeared from the GOP. He has been conservative to exactly the same degree that Richard Nixon basically governed as a moderate liberal, something no conservative would deny today..."

Did You Know That "Irk" Makes a Synonym of Itself in Rot13?: Live from Crows Coffee

Stolen from http://unfogged.com

My quality of life is diminished by the fact that I am not a fluent reader of rot13. Is there a good online drill site?

Liveblogging World War II: October 22, 1944: Leyte Gulf: Background

Battle of Leyte Gulf: Background:

On 12 October 1944, the US 3rd Fleet under Admiral Halsey began a series of carrier raids against Formosa and the Ryukyu Islands, with a view to ensuring that the aircraft based there could not intervene in the Leyte landings. The Japanese command therefore put Shō-Gō 2 into action, launching waves of air attacks against 3rd Fleet's carriers. In what Morison refers to as a 'knock-down, drag-out fight between carrier-based and land-based air', the Japanese were routed, losing 600 aircraft in three days, almost their entire air strength in the region. Following the American invasion of the Philippines, the Japanese Navy made the transition to Shō-Gō 1.

Shō-Gō 1 called for Vice-Admiral Jisaburō Ozawa's ships—known as the 'Northern Force'—to lure the main American covering forces away from Leyte. Northern Force would be built around several aircraft carriers, but these would have very few aircraft or trained aircrew. The carriers would serve as the main bait. As the US covering forces were lured away, two other surface forces would advance on Leyte from the west. The 'Southern Force' under Vice Admirals Shoji Nishimura and Kiyohide Shima would strike at the landing area via the Surigao Strait. The 'Center Force' under Vice Admiral Takeo Kurita—by far the most powerful of the attacking forces—would pass through the San Bernardino Strait into the Philippine Sea, turn southwards, and then also attack the landing area.

This plan was likely to result in the destruction of one or more of the attacking forces, but Toyoda later explained this to his American interrogators as follows:

Should we lose in the Philippines operations, even though the fleet should be left, the shipping lane to the south would be completely cut off so that the fleet, if it should come back to Japanese waters, could not obtain its fuel supply. If it should remain in southern waters, it could not receive supplies of ammunition and arms. There would be no sense in saving the fleet at the expense of the loss of the Philippines.

For Thursday: Josh Bivens, Brad DeLong, Jeff Madrick, Ylan Mui: How Mainstream Economic Thinking Imperils America

DRAFT NOTES

Over at Equitable Growth:Josh Bivens, Brad DeLong, Jeff Madrick, Ylan Mui: How Mainstream Economic Thinking Imperils America:

Thursday, October 23, 2014

1:00 - 2: 30 p.m. ET

Economic Policy Institute

1333 H St., NW

Suite 300

Washington, DC 20005

http://www.epi.org/event/mainstream-economic-thinking-imperils-america/

Advice about what points I should try to hit would be most welcome...

Jeff Madrick's Seven Bad Ideas:

The "Invisible Hand"
Say's Law
Friedman's Folly: Government's Limited Social Role
Low Inflation Is All That Matters
There Are No Bubbles
Globalization Is Always Good
Economics Is a Science

In Madrick's Introduction and Reading Along:

Praised in the Introduction:

John Maynard Keynes
Dani Rodrik

Criticized in the Introduction:

Adam Smith--no comment necessary...
Olivier Blanchard--the de facto leader of the Sixth International: on the left of the spectrum of policymakers...
Larry Summers--principal advocate of the Keynesian expansionary-fiscal solution to our troubles...
Milton Friedman--when he was alive, the most powerful advocate of unlimited quantitative easing...
Bob Rubin--on his watch big banks were bailed-in during financial crises, not bailed-out...
Ben Bernanke--most left-wing central banker we had (although I will concede his attachment to 2%/year inflation target, and failure to reach it, are huge minuses)...
Robert Lucas--underbriefed and destructive...

Madrick on Christina Romer:

In a piece she wrote for The New York Times criticizing an increase in the minimum wage, Christina Romer, the former Obama adviser and considered by many to be a political liberal, implicitly made this same oversimplified assumption that workers usually get what they deserve. This is an example of Friedman’s broad influence...

Romer:

We have better policies available: expand the EITC is better targeted
For the long-run, universal kindergarten and pre-K have more bang for the buck
And these are expansionary fiscal policy--spending money gives a macroeconomic boost as well
But if the choice is for a higher minimum wage or nothing, I'm for a higher minimum wage...

Of these 8, somewhere between 5 and 7 are to the left of current North Atlantic policymakers--not excluding Obama

PFoJ vs. JPF, Perhaps?

A little misplaced ire, I think...

But I don't want to go there...

I Want to Go Here: The Problem, as I See It:

Economics starts from the presumption that market success is the benchmark

And that market failure is anomalous
It ought to start from the presumption that market construction is difficult
It ought to have a grammar of other forms of organization--command, bureaucracy, charity, cooperative, regulated monopoly, yardsticks, etc.--and where they succeed and where they fail

We have a great deal of economic life where we know the market will not work well, and these sectors will only grow in relative importance

Pensions
Health-care finance
Education
Infrastructure
Research and development
Information goods more generally

Policy is far to the right--and not to the smart right--of even where the really existing economics profession, at least the "serious" piece of it in an intellectual sense, is

Why?
How to fix it--books like Jeff's, of course, but how else?
Two tasks: move the "serious" economics profession, and move policymaking to the "serious" economics profesion--both seem of equal importance and difficulty

Christina Romer: [The Minimum Wage, Employment and Income Distribution][refThe Minimum Wage, Employment and Income Distribution]: "If a higher minimum wage were the only anti-poverty initiative available...

...I would support it. It helps some low-income workers, and the costs in terms of employment and inefficiency are likely small. But we could do so much better if we were willing to spend some money. A more generous earned-income tax credit would provide more support for the working poor and would be pro-business at the same time. And pre-kindergarten education, which the president proposes to make universal, has been shown in rigorous studies to strengthen families and reduce poverty and crime. Why settle for half-measures when such truly first-rate policies are well understood and ready to go?

Liveblogging World War II: October 21, 1944: Douglas MacArthur

Doughlas MacArthur:

This is the Voice of Freedom, General MacArthur speaking.

People of the Philippines: I have returned.

By the grace of Almighty God our forces stand again on Philippine soil – soil consecrated in the blood of our two peoples. We have come, dedicated and committed to the task of destroying every vestige of enemy control over your daily lives, and of restoring, upon a foundation of indestructible strength, the liberties of your people.

At my side is your President, Sergio Osmena, worthy successor of that great patriot, Manuel Quezon, with members of his cabinet. The seat of your government is now therefore firmly re-established on Philippine soil.

The hour of your redemption is here. Your patriots have demonstrated an unswerving and resolute devotion to the principles of freedom that challenges the best that is written on the pages of human history.

I now call upon your supreme effort that the enemy may know from the temper of an aroused and outraged people within that he has a force there to contend with no less violent than is the force committed from without.

Rally to me. Let the indomitable spirit of Bataan and Corregidor lead on. As the lines of battle roll forward to bring you within the zone of operations, rise and strike!

For future generations of your sons and daughters, strike! In the name of your sacred dead, strike!

Let no heart be faint. Let every arm be steeled. The guidance of Divine God points the way. Follow in His name to the Holy Grail of righteous victory!

Medicaid: Two Years Late, John Kasich Gets Religion: Live from teh Roasterie

Jason Hart: Gov. Kasich: God Wants Ohio to Expand Medicaid: "Governor John Kasich, a Republican, repeated his insistence that God wants Ohio to expand Medicaid...

...when reporters brought up the topic on June 18. Kasich suggested anyone who opposes Medicaid expansion will have to answer for their opposition when they die. Gov. Kasich said he recently told a state legislator:

I respect the fact that you believe in small government. I do too. I also happen to know that you’re a person of faith. Now, when you die and get to the, get to the, uh, to the meeting with St. Peter, he’s probably not gonna ask you much about what you did about keeping government small, but he’s going to ask you what you did for the poor. Better have a good answer....

Kasich leaned heavily on his Christian faith to push the Patient Protection and Affordable Care Act (PPACA) Medicaid expansion during his February 19 State of the State address, implying the only options were to dramatically increase entitlement spending or leave Ohio’s poor ‘out in the street’...

Jonathan Chait: John Kasich Just Got Extremely Real on Obamacare: "There are certain rules you have to play by...

...in order to be a part of the Republican Party today, and one of the most important is never to say anything nice about Obamacare. Even if you are trying to push the party toward the center on Obamacare, you must pay fealty to the belief that the law is horrible and must be replaced. Ohio Republican governor John Kasich just committed the ultimate taboo:

'That's not gonna happen,' Kasich told The Associated Press during a recent re-election campaign swing. 'The opposition to it was really either political or ideological,' the Republican governor added. 'I don't think that holds water against real flesh and blood, and real improvements in people's lives.'

Obamacare… helps people? The opposition is political or ideological? It should therefore be judged by its actual effects on human lives? Those ideas may be bleedingly obvious, but you can’t say them. Kasich either has no interest in running for president or possibly remaining in the Republican Party at all, or he will soon be delivering a groveling apology.

Update: Some are wondering why Kasich's statement is so shocking, given that he, and several other Republican governors, have already accepted Obamacare's Medicaid expansion. The answer is that accepting the Medicaid expansion, which was already contentious and possibly disqualifying for a potential president, required a series of evasions. Republicans would portray Medicaid as having nothing to do with Obamacare. Or they would argue that the law is horrible, and they would love to repeal it, but until that happens they can't turn away free money for their state. What no major Republican has done is depict the law as a positive good while dismissing opposition."

Noted for Your Afternoon Procrastination for October 20, 2014

Over at Equitable Growth--The Equitablog

On the Proper Inflation Target: Monday Focus for October 20, 2014 - Washington Center for Equitable Growth
Emmanuel Saez & Gabriel Zucman: Exploding wealth inequality in the United States - Washington Center for Equitable Growth
Nick Bunker: Thomas Piketty, depreciation and the elasticity of substitution - Washington Center for Equitable Growth
Morning Must-Read: Pascal Michaillat and Emmanuel Saez: Unemployment, and Product and Labour-Market Tightness - Washington Center for Equitable Growth
: Morning Must-Read: Daniel Davies: European Banking Stress Tests-Pour Encourager les Autres? - Washington Center for Equitable Growth
Morning Must-Read: Paul Kasriel: The Monetary Base and the Money Multiplier: U.S. and Eurozone - Washington Center for Equitable Growth
Morning Must-Read: Daniel Drezner: Five Known Unknowns About the Future of the Global Economy - Washington Center for Equitable Growth

Plus:

Things to Read on the Afternoon of October 20, 2014 - Washington Center for Equitable Growth

Must- and Shall-Reads:

Katie McDonough: The right’s Lena Dunham delusion: Anger, misogyny and the dangers of business as usual
Ha-Joon Chang: Why did Britain’s political class buy into the Tories’ economic fairytale?
Wolfgang Münchau: Eurozone stagnation is a greater threat than debt
Daniel Drezner: Five Known Unknowns About the Future of the Global Economy
Paul Kasriel: A Tale of Two Economies--It Was the Better of Times, It Was the Worst of Times
Daniel Davies: European Banking Stress Tests--Pour Encourager les Autres?
Pascal Michaillat and Emmanuel Saez: Unemployment, and product and labour-market tightness
Lant Pritchett and Lawrence H. Summers: Asiaphoria Meets Regression to the Mean

And Over Here:

Over at Equitable Growth: On the Proper Inflation Target: Monday Focus for October 20, 2014 (Brad DeLong's Grasping Reality...)
The Politics of American Cities: Live from teh Roasterie (Brad DeLong's Grasping Reality...)
The New York Times Publishes Casey Mulligan as a Joke, Doesn't It?: Hoisted from the Archives (Brad DeLong's Grasping Reality...)
Liveblogging World War I: October 20, 1914 The First Battle of Ypres (Brad DeLong's Grasping Reality...)
In My Email Inbox This Morning, Snoozed from Six Months Ago (Brad DeLong's Grasping Reality...)
Should I Be Pleased or Depressed by Baen Books This Afternoon?: Live from the Roasterie (Brad DeLong's Grasping Reality...)

Daniel Drezner: Five Known Unknowns About the Future of the Global Economy: "Here are my top five known unknowns about the future of the global economy.... 1) The Summers/Gordon Question.... What if the elevated rates of economic growth that started with the Industrial Revolution are now petering out in the developed world? What if all the low-hanging fruit that have kept growth high for the last two centuries have been exhausted? 2) The Eichengreen/Rodrik Question. The default assumption that most economists make is that the developing world in general, and the BRICS in particular, will converge towards the affluence level of the developed world. This might not be the case... there is a very real ‘middle income trap’ that can lead to a serious growth slowdown in the advanced developing countries. Even more disturbing is Dani Rodrik’s contention that while globalization has led to a true convergence in manufacturing productivity, it hasn’t caused any convergence in the rest.... 3) The Angell/Gartzke Question.... What if geopolitical tensions force a re-ordering of economic ties? This could erode the pacifying effects of commercial liberalism that scholars from Norman Angell to Erik Gartzke have observed.... 4) The Fukuyama/Kirshner Question.... Jonathan Kirshner’s new book... argu[es] that China and others are now rejecting the U.S. financial model. If Kirshner is right, what will this mean for the future of economic growth? More radically, what if other countries reject the capitalist model wholesale?.... 5) The Piketty/Freeland... argument... that, left to its own devices, capitalism will produce a dystopia where elites will grab an ever-growing share of the economic pie. What happens to the global economy if he’s right?  What kind of political backlash will it produce?.... Enjoy the week!"

Paul Kasriel: A Tale of Two Economies--It Was the Better of Times, It Was the Worst of Times: "As quantitative easing comes to an end (apparently) by the Fed and is taken up by the European Central Bank (ECB), let’s compare the behavior of nominal domestic demand in each central bank’s economy and venture a reason for any differences. Plotted in Chart 1 are index values of the nominal Gross Domestic Purchases in the U.S. and the eurozone, respectively.... Now, let’s examine the behavior of credit created by the central banks and depository institutions in each of these economies. This is credit that is created figuratively out of thin air. When central banks purchase securities in the open market, such as they do when they engage in quantitative easing (QE), they create credit out of thin air. When the depository institution system expands its loan and securities portfolios, it creates credit out of thin air. Credit created out of thin air enables the borrower to increase his/her current nominal spending while not requiring any other entity to reduce its current spending..."

Daniel Davies: European Banking Stress Tests--Pour Encourager les Autres?: "It will turn out, I think, that a lot of banks will fail on the front cover, but pass at the back of the book--this would happen, for example, if a bank was made aware early in the year that it was at risk, and decided to do something about it. I think I can see the thinking behind this way of presenting the results. The Euroland supervisors are hoping that the headline news will be made by the front pages of the reports, so they will be able to have it both ways--a big headline in the Financial Times and the Wall Street Journal saying that their test was credible because it failed so many big names, while at the same time tipping the wink to market analysts that most of the ‘failures’ were not really failures at all, and that nearly all of the required recapitalisations have already happened. To be honest, I find this communication strategy rather clever..."

Pascal Michaillat and Emmanuel Saez: Unemployment, and product and labour-market tightness: "We do not have a model that is rich enough... and simple enough to lend itself to pencil-and-paper analysis.... Michaillat and Saez (2014)... retains the architecture of the Barro-Grossman model but replaces the disequilibrium framework on the product and labour markets with an equilibrium matching framework.... Both meal prices and product market tightness can adjust to equilibrate supply and demand for meals.... Both wages and labour market tightness adjust to equilibrate labour supply and demand.... If product and labour market tightness remain constant, the equilibrium is reached by price adjustment.... If prices are rigid, the equilibrium is reached by adjustment of product and labour market tightness.... A negative labour demand shock leads to falls in both employment and labour market tightness.... A negative labour supply shock leads to a fall in employment but an increase in labour market tightness.... Output and product market tightness move in the same direction with demand shocks.... Output and product market tightness move in opposite direction with technology shocks.... Through the lens of our simple model, the empirical evidence suggests that price and real wage are somewhat rigid, and that unemployment fluctuations are mainly driven by aggregate demand shocks..."

Lant Pritchett and Lawrence H. Summers: Asiaphoria Meets Regression to the Mean: "Consensus forecasts for the global economy over the medium and long term predict the world’s economic gravity will substantially shift towards Asia and especially towards the Asian Giants, China and India. While such forecasts may pan out, there are substantial reasons that China and India may grow much less rapidly than is currently anticipated. Most importantly, history teaches that abnormally rapid growth is rarely persistent, even though economic forecasts invariably extrapolate recent growth. Indeed, regression to the mean is the empirically most salient feature of economic growth. It is far more robust in the data than, say, the much-discussed middle-income trap. Furthermore, statistical analysis of growth reveals that in developing countries, episodes of rapid growth are frequently punctuated by discontinuous drop-offs in growth. Such discontinuities account for a large fraction of the variation in growth rates. We suggest that salient characteristics of China—high levels of state control and corruption along with high measures of authoritarian rule—make a discontinuous decline in growth even more likely than general experience would suggest. China’s growth record in the past 35 years has been remarkable, and nothing in our analysis suggests that a sharp slowdown is inevitable. Still, our analysis suggests that forecasters and planners looking at China would do well to contemplate a much wider range of outcomes than are typically considered."

Should Be Aware of:

The Cambridge University Worshippers of Cthulhu Society Home Page
James Burns: Return of the Space Shh!uttle | File 770
Khan Academy: The Pythagorean Theorem

 

Economist: The history of inequality: Breaking the camel’s back: "Average heights have risen almost everywhere (by 1.1cm more in America in 1820-1990 than in China). The purchasing power of construction workers’ wages has grown everywhere, though in Britain the rise was tenfold in 1820-2000; in Indonesia it was only twice.... In China, Thailand, Germany and Egypt, income inequality was about the same in 2000 as it had been in 1820. Brazil and Mexico are even more unequal than they were at the time of Simón Bolívar. Only in a few rich nations—such as France and Japan—do you find the expected long-term decline in income inequality. What is true for individual countries is also true if you treat the world.... The two-century rise in global inequality... come[s] from...‘between-country inequality’, the gap between rich and poor nations.... In 1820 the world’s richest country—Britain—was about five times richer than the average poor nation. Now America is about 25 times wealthier than the average poor country..."

Corey Robin: When I draw comparisons between libertarians and slaveholders… : "When I put libertarians and slaveholders in the same orbit, libertarians go ape-shit. But when they do it— 'We [Alex Tabarrok and Tyler Cowen] treat John C. Calhoun as a precursor of modern public choice theory. Calhoun anticipates the doctrine of public choice contractarianism as developed by Buchanan and Tullock and expands this approach in original directions. We consider Calhoun’s theory of why democracy fails to preserve liberty and Calhoun’s suggested constitutional reform, rule by unanimity. We also draw out parallels between Calhoun and Hayek with regard to theories of social change and Hayek’s analysis of ‘why the worst get to the top.’ The paper concludes with some remarks on problems in Calhoun’s theory.' —it’s all good. Of course, it helps if you can resolve that pesky question of slavery like so: 'Furthermore, Calhoun furnishes only weak ethical foundations for his advocacy of the concurrent majority…. This lack of ethical foundation shows up in Calhoun’s defense of slavery, which continues to hurt his reputation and draw attention from his more valid and interesting contributions'."

Over at Equitable Growth: On the Proper Inflation Target: Monday Focus for October 20, 2014

Over at Equitable Growth: In the 60 years since 1954, the Federal Reserve has been moved to cut the 3-Mo. T-Bill rate when a recession threatens by 2.0%-points or more 13 times--once every 4.6 years. There have been eight cuts of 4.0%-points or more--once every 7.5 years. There have been five cuts of 5.0%-points or more--once every 12 years.

To me that suggests that the Greenspan-Bernanke policies--aim for 2.0%/year inflation, with a 300 basis-point "natural" short-term safe real interest rate on top of that when the economy is in the growth-along-the-potential-path phase of the business cycle--were already too restrictive. Once every 12 years is too often to run into ZLB problems, unless you are a strong believer in Coibion and Gorodnichenko arguments that price inertia is due to serious costs to businesses of altering price paths. READ MOAR

If you hold, with Jeremy Stein, that you are asking for trouble when T-Bill rates drop below 2%/year, and if you believe that secular factors have reduced the "natural" short-term safe real interest rate when the economy is in the growth-along-the-potential-path phase of the business cycle to 2%, and if you wish to have a 600 basis-point cushion to allow for appropriate cutting in a recession, then you should aim for a 6%/year inflation target.

If you don't mind kissing the zero lower bound when you cut interest rates by 600 basis points, you could get away with a 4%/year inflation target.

And if you don't mind dissing the zero lower bound and do not buy the argument that the "natural" short-term safe real interest rate when the economy is in the growth-along-the-potential-path phase of the business cycle is now not 3%/year but 2%/year, then you could get away with a 3%/year inflation target.

But I do not see how you can justify a 2%/year inflation target today.

Suppose that you want a 200-basis point cushion--that you are not happy with putting your commercial banks in a situation in which their business model requires that they take huge risks to even try to cover the costs of maintaining their ATMs and their branches--and buy the 2%/year "natural" short-term safe real interest rate when the economy is in the growth-along-the-potential-path phase of the business cycle, but recoil at a 6%/year inflation target as too high? What then? Then you have to go for régime change:

Reform fiscal policy so that--unlike 2008-present--it does its stimulative job to boost aggregate demand when interest rates are at their zero lower bound.
Move to some form of level targeting so that the inflation target is no longer fixed, but rises and rises sharply whenever aggregate demand or the price level undershoots its previously-expected growth path.
Allow the central bank to engage in expansionary fiscal policy on a large scale on its own say-so, via helicopter drops--the Social Credit solution.
Move to Miles Kimball Land

Those are the options...

Memo: Interest-rate cutting episodes since 1954: 2.9%-points, 2.1%, 2.0%, 5.0%, 2.2%, 4.5%, 8.5%, 9.0%, 3.2%, 2.5%, 5.0%, 4.3%, 9.5%-points (assuming the interest-rate rule called for cutting nominal rates in 2009 to -4.5%).

484 words

The Politics of American Cities: Live from teh Roasterie

Note that these are the cities themselves--what lies within the municipal boundaries--not the metropolitan areas:

Cory Doctorow: American cities, ranked by conservatism: "A fascinating chart from Representation in Municipal Government...

...published in American Political Science Review and written by MIT political scientists Chris Tausanovitch and Christopher Warshaw. (via Bruce Sterling):