J. Bradford DeLong's Blog, page 1151

Forthcoming Event for September 16, 2014: The Economy: Does More Government Help or Hurt? | Kansas City Public Library: Live from the Roasterie

Should be good:

Stephanie Kelton, Joseph Haslag, Mike Shanin: The Economy: Does More Government Help or Hurt? | Kansas City Public Library:

How much does the government really know about people’s wants and needs? And is there a clear market failure that policy can address? A back-and-forth expression of conflicting views spills into this event featuring Stephanie Kelton, chair of the University of Missouri-Kansas City’s Department of Economics, and University of Missouri economics professor Joseph Haslag, who will discuss the government’s proper role in the economy and take audience members’ written questions. Mike Shanin, who leads the weekly roundtable of conservatives and liberals on KCPT-TV’s Ruckus, will moderate.

Co-sponsored by the Jobs Now! Coalition and the Show-Me Institute.

Over at Equitable Growth: Department of "Huh?!" John J. Mearsheimer Thinks the West Caused the Ukraine Crisis?: The Honest Broker for the Week of September 19, 2014

Over at Equitable Growth: John Mearsheimer is only one of a surprising number claiming that the current crisis in Ukraine is predominantly the U.S.'s, and NATO's, and the Ukraine's fault:

John Mearsheimer: How the West Caused the Ukraine Crisis: Why the Ukraine Crisis Is the West’s Fault: "The United States and its European allies share most of the responsibility...

...The taproot of the trouble is NATO enlargement.... For Putin, the illegal overthrow of Ukraine’s democratically elected and pro-Russian president--which he rightly labeled a “coup”--was the final straw.... Realpolitik remains relevant--and states that ignore it do so at their own peril. U.S. and European leaders blundered in attempting to turn Ukraine into a Western stronghold on Russia’s border....

Soviet leaders... and their Russian successors did not want NATO to grow any larger and assumed that Western diplomats understood their concerns. The Clinton administration evidently thought otherwise.... The first round of enlargement... 1999... the Czech Republic, Hungary, and Poland. The second... 2004... Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia, and Slovenia. Moscow complained bitterly.... The alliance considered admitting Georgia and Ukraine.... Putin maintained that admitting those two countries to NATO would represent a “direct threat” to Russia.... READ MOAR

Mearsheimer continues:

The West’s triple package of policies--NATO enlargement, EU expansion, and democracy promotion--added fuel to a fire waiting to ignite.... On February 21, the government and the opposition struck a deal.... But it immediately fell apart, and Yanukovych fled to Russia the next day. The new government in Kiev was pro-Western and anti-Russian to the core, and it contained four high-ranking members who could legitimately be labeled neofascists. Although the full extent of U.S. involvement has not yet come to light, it is clear that Washington backed the coup.... For Putin, the time to act against Ukraine and the West had arrived....

Ukraine serves as a buffer state of enormous strategic importanc.... No Russian leader would tolerate a military alliance that was Moscow’s mortal enemy until recently moving into Ukraine. Nor would any Russian leader stand idly by while the West helped install a government there that was determined to integrate Ukraine into the West.... This is Geopolitics 101: great powers are always sensitive to potential threats near their home territory....

There is a solution to the crisis in Ukraine, however--although it would require the West to think about the country in a fundamentally new way.... Western leaders should acknowledge that Ukraine matters so much to Putin that they cannot support an anti-Russian regime there.... The United States and its allies should publicly rule out NATO’s expansion... considerably limit its social-engineering efforts inside Ukraine. It is time to put an end to Western support for another Orange Revolution.... Even if one... believes that Ukraine has the right to petition to join the EU and NATO, the fact remains that the United States and its European allies have the right to reject these requests.... Indulging the dreams of some Ukrainians is not worth the animosity and strife it will cause, especially for the Ukrainian people...

Mearsheimer appears to believe:

There is a thinking entity called "Russia" which has preferences and interests, and which has rights to have its preferences satisfied and its interests accommodated.
"Russia" has an interest in and prefers to have Kiev ruled by a corrupt thug pleasing to whatever corrupt thug currently rules in Moscow.
The United States should not say "boo" to this: it should not seek to extend its security umbrella over Kiev, it should not seek greater economic integration with Kiev, it should not encourage the growth of a civil society and democratic polity in Kiev that would object to be ruled by a corrupt thug pleasing to Moscow.
The rest of NATO and the European Union should also not say "boo" to this: they should not seek to extend its security umbrella over Kiev, they should not seek greater economic integration with Kiev, they should not encourage the growth of a civil society and democratic polity in Kiev that would object to be ruled by a corrupt thug pleasing to Moscow.

Needless to say, if Mearsheimer were to attempt to explain his reasoning to an intelligence from outer space--vast or not, cool or warm, sympathetic or unsympathetic--he would be met with vast incomprehension. It would see not Russia but Russians. It would see that many of those Russians believe that they and their ancestors belonged to various imagined communities in the past--the Tsarist Empire, the Union of Soviet Socialist Republics--but it would not see "Russia" as having interests in preferences. It would see Russians as such--and it would see Russians aggregating up their individual preferences into those of the community that they imagine they belong to and wish to belong to.

And the Russians have always--well, since Dmitri Donskoi--oscillated between seeking to and believing they belong to three different imagined communities, which have themselves changed over time. Think of each of these three in terms of its notional geographic center: Kiev, Novgorod, and Moscow.

The imagined community that is Kievan 'Rus is the east most outpost of a Mediterranean and European-oriented civilization. It saw itself as in the sphere of influence of the Byzantine Empire ruled from Constantinople. And then, after the fall of Constantinople, it sought a place as a European marshland oriented toward Vilnius or Warsaw on which it relied to try to protect it from the steppe nomads--the Mongols and the Turks. capital of the Byzantine Empire-that-was, that is--and Warsaw.

Old Kiev, the city of Oleg and his Rurikid descendants, was oriented toward Constantinople, and via its Slavonic Orthodox church and Byzantine culture Kieven 'Rus has retained a strong degree of orientation toward the rest of the Greek-orthodox world. But old Kiev's residents were all slaughtered and the city razed in 1240 by Batu Khan's Mongols. We see a rebuilt Kiev in 1262. It was ruled by Lithuanian princes. At first it owes allegiance and tribute to the militarily-stronger Khanate of the Golden Horde. After 1362 it is part of the Grand Duchy of Lithuania. After 1569 it is part of the Kingdom of Poland. In 1648 the Dneipr Cossacks allied with Muscovy to establish the Hetmanate. The hetmanate is first independent, then autonomous and self-governing but owing allegiance to the Muscovite Tsar in Moscow, and after 1775 neither independent nor autonomous nor self-governing. From 1775 until the fall of the Tsarist empire in 1918 Kiev was ruled from Moscow--but much of Kievan 'Rus, what we now call the western Ukraine, was ruled from Vienna, with its major city of Lviv called Lemburg. After the 1918-1922 Russian Civil War Kiev was, again, ruled from Moscow until 1991--but it was a strange sort of rule, in which schoolchildren were taught that they were one of fifteen equal and autonomous union republics in the Union of Soviet Socialist Republics, of their own nationality, with their own language, traditions, history, and heritage; while behind the scenes all the shots were called in Moscow.

The imagined community that was the 'Rus of Novgorod the Great has always been oriented toward the Baltic and the North Sea beyond: Sweden, Germany, the Hanseatic League, Holland, international trade. Peter the Great, the Romanov Czar of Muscovy, built St. Petersburg precisely because he wished his empire to imagine itself not so much Muscovite as Novgorodian. Peter saw Saint Petersberg as providing his Moscow-centered realm with "a window on the west" that was maritime Europe. But the Baltic littoral and as far inland as you could navigate a barge in summer did not need a window on the west: Novgorod (and Riga) were cities as European as Helsinki or Stockholm or Danzig.

And then there is the imagined community of Muscovy 'Rus. Far enough north in the forests that the Mongols could not easily and permanently dominate it. Far enough east that western Europeans could not easily control it--as Karl XII Vasa discovered at Poltava in 1709, as Napoleon I Bonaparte discovered at Kaluga in 1812, and as Adolf Hitler discovered at Stalingrad in 1942. Muscovy 'Rus is the civilization of the Third Rome, the heart of Slavonic Orthodoxy: neither western European, Middle-Eastern, nor steppe-Mongol. Muscovy 'Rus is the civilization of the very strong leader--the vozhd--desperate for geographic buffers against invaders from the east, from the south, and most recently from the west. Moscow, after all, was sacked in 1238, 1382, 1571, 1610, and 1812, and what Hitler and the Nazi Germans did to Russia in 1941-1944 was worse by far than a mere sack.

The polity of the Tsars came to dominate the lands of all the Russians in a long slow process of fits and starts, and carried along with it a collective decision imposed by persuasion, force, and fraud that the Russians were to imagine that their community was Muscovy 'Rus--not Kievan 'Rus oriented toward Constantinople, Vienna, and Warsaw; not Novgorod 'Rus oriented toward Stockholm, Copenhagen, and Hamburg. At least some of the Tsars who did the most to advance the political project of the Muscovite empire--Peter the Great, Catherine the Great, and Alexander I with his French-speaking aristocracy come immediately to mind--had at least mixed thoughts about this. They, it was clear, would have greatly preferred that the empire they were building has its heart in Novgorod 'Rus rather than Muscovy 'Rus. Consider: Peter I Romanov's daughter Elizbeth I Romanov married a Russian. But afterwards Russian blood ran scarce in the family of the Tsar: Elizabeth brought her half-German nephew Peter von Holstein-Gottorp to Moscow and married him to Sophia von Askanien--who became Catherine the Great. Their son Paul I Romanov married Sophia Dorothea von Beutelsbach. Their son Nicholas I Romanov married Charlotte von Hohenzollern. Their son Alexander II Romanov married Marie von Hesse und zu Rhein. Their son Alexander III Romanov married Princess Dagmar of Denmark. And their son Nicholas II Romanov married Alix von Hesse und zu Rhein.

The ambivalent attitude of the rulers of 'Rus toward their Muscovy power base came to a sharp end in 1917 with the accession to power of Vladimir Ilyich Ulyanov--Lenin. Lenin believed that he was a bit player in the great socialist revolution of the early twentieth century. It was his job, he believed to make the socialist revolution for the nationality of the Moscow-centered Great Russians. Other nationalities--Finnish, German, Estonian, Polish, Ukrainian, Georgian, Kazakh, and so forth--would make their own socialist revolutions. He would help to the extent that he could. But to take over was not his job. He did not aspire to rule the empire of the Tsars: he did not want to be the jailer of the prison-house of nationalities that the Romanovs had assembled under their rule. He sought, rather, to lead the Russian people--in comradely and brotherly alliance with their neighbors--into Karl Marx's classless utopia. This made Lenin both an anti-nationalist and a cosmopolitan nationalist. He was an anti-nationalist in that--unlike nearly everyone else of his followers--he did not particularly care about the terms on which his Bolshevik Russia made its peace with Germany and withdrew from World War I. The German socialist revolution was imminent, after all, and after it took place borders would be adjusted and treaties rewritten in mutual brotherhood. He did not think that Russia should be great. He thought that peoples should be free--and socialist, and therefore allied.

Lenin's successor Stalin would have none of this. He wanted the empire of the Tsars, and more. Local autonomy and local nationality were useful illusions with which to beguile, but power needed to be centralized in Moscow, in the Kremlin, and in Stalin. However, a strange thing happened. The formal structure of the USSR remained that of fifteen union republics. And the educational system of the Soviet Union taught everyone that their ethnicity was an honorable nationality of its own. And over seventy years people came to believe this: come 1991 the Estonians were more Estonian, the Ukrainians more Ukrainian, the Georgian more Georgian, and the Kazakhs and Tadjiks more Kazakh and Tadjik than they had been eighty years before.

Come the fall of the Soviet Union in 1991, therefore, we find that we have five overlapping and inconsistent lines of division/poles of attraction:

The continued attraction of the peoples of all the Russias to the three different imagined communities--Orthodox/pan-Slavic/Polish Kievan 'Rus, autonomous and separate Muscovite 'Rus, and cosmopolitan-European Novgorod 'Rus.

70 years of cultural and psychological nation-building of a separate nation in each union republic and, within the union republics, each autonomous region.

A greater degree of ethno-linguistic fragmentation within the boundaries of the Soviet Union's successor states than had been seen elsewhere in Europe since the 1920s--for with notably rare exceptions (cough, Crimean Tartars, cough, and others) Stalin's terror was equal-opportunity (if with an anti-semitic bias) and did little to alter the ethno-linguistic balance of a region.

Combined and uneven economic and political development in the successor states of the USSR.

Historical memories of Muscovite domination from the Kremlin--cough, holodomor,cough--that do not make people who do not identify themselves as belonging to the Great Russian ethnos eager for another round...

And everyone involved is now all trying to work all of this out.

But where in all of this, an alien intelligence would ask, is it written in stone that whoever rules in the Kremlin speaks for Russia--or, at least, speaks for Muscovy 'Rus--and his the right to install a corrupt thug of this choice in Kiev, or to veto any Kievan government he does not like?

If John Mearsheimer were a smarter man, he would, I think, be speaking not to Obama but to Putin. He would not be telling Obama to cool it on "social engineering" in--i.e., the economic development and democratization of--the Ukraine. He would be telling Putin that the imposition of Soviet puppet regimes in Poland, Czechoslovakia, East Germany, and Hungary produced an enormous running sore and was a long-term source of great weakness for the Soviet apparatchicks who ruled in the Kremlin. And he would be telling Putin that pulling the Crimea, Donetsk, and Luhansk away from Kiev will do more than anything else could to ensure that those who rule in Kiev will offer him and his successors in the Kremlin as little as possible. And that going beyond that to install and maintain a puppet regime in Kiev will do more damage to the security of Muscovy 'Rus than almost anything else one could imagine.

Curation and Self-Aggregation for September 11, 2014: A Baker's Dozen

http://tinyletter.com/braddelong | http://tinyletter.com/braddelong/letters/curation-and-self-aggregation-for-september-11-2014-a-baker-s-dozen

This Week's Baker's Dozen:

Over at Equitable Growth: IS-LM as "obfuscation"? No!: http://delong.typepad.com/sdj/2014/09/over-at-equitable-growth-is-lm-as-obfuscation-no-thursday-focus-for-september-11-2014.html

Over at Equitable Growth: Can we get out of our macroeconomic dark corner: http://delong.typepad.com/sdj/2014/09/trapped-in-the-dark-corners-thoughts-on-olivier-blanchards-where-danger-lurks-the-honest-broker-for-the-week-of-sep.html

Over at Equitable Growth: Breaking my heart by reading my archives: me, five years ago, on generating a robust recovery: http://delong.typepad.com/sdj/2014/09/over-at-equitable-growth-hoisted-from-the-weblog-archives-reading-which-breaks-my-heart-from-five-years-ago-generating-a.html

Over at Equitable Growth: There is no government debt constraint as long as we remain in an n + g > r world: http://delong.typepad.com/sdj/2014/09/over-at-equitable-growth-aint-it-fun-living-in-an-r-ng-world-tuesday-focus-for-september-9-2014.html

Richard Mayhew on the (lack of) morals of the Halbig Troofers: http://www.balloon-juice.com/2014/08/12/shame-would-be-a-good-thing/

Destructive policies bring red-state recessions closer to reality: http://econbrowser.com/archives/2014/08/wisconsin-forecasted-to-lag-further-behind-minnesota

Trolling: Why Is Noah Smith Surprised at the Continuing Job Shortage?: http://delong.typepad.com/sdj/2014/09/20140908-over-at-equitable-growth-why-is-anybody-surprised-that-the-job-shortage-continues-for-so-long-in-which-i-troll-no.html | What Does Nick Rowe Think Is Special About Recessions in a Monetary Economy?: http://delong.typepad.com/sdj/2014/09/over-at-equitable-growth-what-is-special-about-recessions-in-a-monetary-economy-trollng-nick-rowe.html (Over at Equitable Growth)

SHARK WEEK!!!!: http://delong.typepad.com/sdj/2014/09/shark-week.html

Robert Waldmann from 2012 on counter-clockwise Beveridge Curve loops without shifts in structural unemployment: http://delong.typepad.com/sdj/2014/09/evening-must-read-robert-waldmann-2012-beveridge-curve-loops.html

Bobby Jindal and other "you really could not make this stuff up" red-state politics shenanigans: http://delong.typepad.com/sdj/2014/09/20140904-across-the-wide-missouri-gov-bobby-jindals-bizarre-scheme-to-stop-his-own-education-plan-by-suing-the-obama-ad.html

Over at Equitable Growth: Claims that the Bulk of the Post-2008 Decline in Labor Force Participation Are "Structural" Need to Surmount a Very High Bar Indeed: http://equitablegrowth.org/2014/09/05/claims-bulk-post-2008-decline-labor-force-participation-structural-need-surmount-high-bar-indeed-friday-focus-september-5-2014/

Daniel Kuehn on how minimum wage studies with better controls show much less disemployment effect2: http://www.epi.org/publication/importance-study-design-minimum-wage-debate/

A Truly Worthwhile Semi-MOOC1: Cosma Shalizi on Big Data (yes, I know he doesn't want me to call it that...)
http://vserver1.cscs.lsa.umich.edu/~crshalizi/weblog/1103.html

Morning Must-Read: Cardiff Garcia: Slacking to Stand Still

Cardiff Garcia: Slacking to Stand Still: "A paper released last week by [Stephanie Aaronson et al.]... concludes that most of the decline in the labour force participation rate since the recession has been structural.... 'Our cohort-based model suggests that cyclical weakness was depressing the participation rate by about ¼ percentage point in 2014:Q2'...

As I said before, this smells to me like overfitting: I want a reconciliation with Moffitt et al. (2012) and also a much better reconciliation with the behavior of the prime-aged participation rate as well:

To quote Aaronson et al. (2006):

Increases in the participation rate of adult women likely stem from numerous structural factors.... It seems likely that new generations internalized many of these changes more easily than did mature cohorts, who had already made “sticky” choices.... Much of the change in the aggregate female participation rate appears to have resulted from progressively higher average participation rates of successive cohorts..... The participation rate for men in their prime working years... held steady during the strong labor market of the mid- to late-1990s. After turning down again during the 2001 recession, it has been fairly flat since 2002.

That is not the lead-in that would lead us to expect a conclusion that the 2.5%-point decline in prime-age participation since 2007 is "structural"...

Cardiff goes on:

The wider issue is that trends thought to be structural aren’t necessarily irreversible.... The dovish argument, to which we still subscribe, is that the only way to know is for the Fed to aggressively pursue [expansion until]... the labour market becomes so tight that employers feel they have no choice but to make work more attractive.... Year-on-year headline PCE inflation is 1.6 per cent through July, the last available reading--which also happens to be its average rate since the recession. That’s not only an extended period of undershooting 2 per cent, but also a staggering demand fail given what happened to labour markets in that period.... To further make incoming data, rather than time, the clear contingency on which to base monetary policy would be perfectly sensible...

A Brief Note on Texas "Hospitality": Watching Californian Kevin Drum Get Annoyed at Jay Nordlinger: Live from Caribou Coffee: September 11, 2014

One of the things that holds our society together is that our arms-length market transactions are not completely arms-length--that in nearly all (except our transactions with used-car salesmen and financial-market counterparties) have some element of reciprocal social solidarity-generating gift-exchange in them.

To try to break that is not "hospitality"--is not treating somebody like a guest. It is, rather, the reverse.

And so Kevin Drum is annoyed:

Kevin Drum: A Brief Note on Texas Hospitality "Jay Nordlinger had an unusual experience...

...with a taxi wrangler at the Dallas airport yesterday:

The man put my suitcase in a taxi’s trunk. I handed him a tip. He said, “No, no, we’re not allowed to take that.”I have been a fair number of places over the years — and I bet I could count refusals of a tip on one hand.... There is something I tell people who think they don’t like Texas: Just go there. That’ll cure you. Texas is distinctively hospitable, and the food, girls, etc., cannot be surpassed (though they can be matched).

For what it's worth, 'hospitable' is not the same thing as 'airport authorities don't allow employees to accept tips.' The former is a trait of people who are just being nice. The latter is something that CEOs force on their low-paid employees. There's a difference.

Noted for Your Morning Procrastination for September 11, 2014

Over at Equitable Growth--The Equitablog

Alexandra Mitukiewicz: A tale of two family-friendly policies - Washington Center for Equitable Growth
Nick Bunker: The importance of workplaces in rising income inequality - Washington Center for Equitable Growth
IS-LM as "Obfuscation"? No: Thursday Focus for September 11, 2014 - Washington Center for Equitable Growth
Morning Must-Read: Henry Aaron, David Cutler, and Peter Orszag: Stop the Anti-Obamacare Shenanigan - Washington Center for Equitable Growth
Morning Must-Read: Helene Jorgensen and Dean Baker: The Affordable Care Act: A Family Friendly Policy - Washington Center for Equitable Growth
"Trapped in the 'Dark Corners'"?: Thoughts on Olivier Blanchard's "Where Danger Lurks": The Honest Broker for the Week of September 12, 2014 - Washington Center for Equitable Growth
Exorbitant Privilege, Debt Capacity, and the Eurozone: A Puzzle in Economic Theory - Washington Center for Equitable Growth
Afternoon Must-Read: Ryan Sweet and Adam Ozimek: U.S. Employment Outlook: Solving the Wage Puzzle - Washington Center for Equitable Growth
Sam Wang Proposes a Senate Election Bet to Nate Silver - Washington Center for Equitable Growth
What Is Special About Recessions in a "Monetary Economy": Trollng Nick Rowe: Wednesday Focus for September 10, 2014 - Washington Center for Equitable Growth
Medicaid Expansion: Missed Opportunities by Red States - Washington Center for Equitable Growth
Morning Must-Watch: Adam Posen: The Old Normal for The World Economy - Washington Center for Equitable Growth
Over at Equitable Growth: Hoisted from the Weblog Archives, Reading Which Breaks My Heart, from Five Years Ago: Generating a Robust Recovery - Washington Center for Equitable Growth

Plus:

Things to Read on the Morning of September 11, 2014 - Washington Center for Equitable Growth

Must- and Shall-Reads:

Barry Eichengreen: The Rules of Central Banking Are Made to Be Broken
Jared Bernstein: Larry Summers adds concerns about insufficient supply to those about inadequate demand… to which I ask, “why go there?”
Matthew C. Klein: Wealth effect may one day stop being so great for wealthy, says wealthy person

 

Adam Posen: The Old Normal for The World Economy

Ryan Sweet and Adam Ozimek: U.S. Employment Outlook: Solving the Wage Puzzle: "The U.S. labor market has tightened, but wage growth remains mediocre at best. This appears counterintuitive: All else equal, falling rates of unemployment should prompt faster wage growth. Several potential explanations have been offered.... One is that the unemployment rate could be sending a false signal about the amount of slack in the job market. Another... blames pent-up wage deflation... firms could not cut nominal wages by as much as they wanted during the recession, and are thus reluctant to raise wages now.... Because the economies of U.S. states experienced different rates of recession and recovery, they offer a laboratory in which to test the pent-up wage deflation hypothesis.... In six states the unemployment rates are below NAIRU, while in four states it is 1.5 percentage points above full employment.... The pent-up wage deflation hypothesis predicts that wages will accelerate not steadily, but quickly once the tipping point is reached. While the data show some relationship between wages and the unemployment gap, the results show little evidence of an acceleration in wage growth as the economy approaches full employment. This suggests there is no pent-up wage deflation.... We believe the labor market still has considerable slack... includ[ing] workers unemployed longer than six months, those who left the workforce but will return once job opportunities appear, and part-timers who would prefer to work full time.... Because the unemployment rate is no longer an accurate measure of labor force, assumptions about the unemployment gap can produce incorrect expectations of when wages will accelerate..."

[image error]Helene Jorgensen and Dean Baker: The Affordable Care Act: A Family Friendly Policy: "Table 3 gives a breakdown of the distribution of part-time employment by age, gender, and whether or not the household has children. As can be seen, women accounted for the entire rise in voluntary part-time employment, with an increase of 3.2 percent in 2014 compared with 2013. By contrast, voluntary part-time employment for men actually fell slightly. Furthermore, it is younger workers, ages 16-35, who account for the bulk of the increase. The number of people in this age group voluntarily working part-time rose by 5.0 percent. By comparison it dropped by 5.2 percent for workers between the ages of 45-55. There were small rises of less than 1.0 percent for the other two age groups. The biggest increase in voluntary part-time is for young people with children. The percentage of employed young people with children working part-time increased 11.3 percent from 2013 to 2014. For young people with three or more children the percentage working part-time increased by 15.4 percent."

Henry Aaron, David Cutler, and Peter Orszag: Stop the Anti-Obamacare Shenanigans: "So far, opponents of the Affordable Care Act have lost every major battle to repeal or invalidate it. Some of them are now urging the courts to interpret the health reform law in a way that would guarantee its failure.... Having failed to undo the individual mandate to buy health insurance, opponents now claim that, under the law, subsidies for low- and moderate-income Americans to buy insurance may be paid only in those states--currently 14--that have set up their own online insurance exchanges. This would torpedo a central goal of the law: the expansion of coverage. At first, those of us who support Obamacare thought these claims were a joke. On July 22, the federal appellate court in Richmond, Va., rejected one such claim, but the same day, astonishingly, the federal appellate court for the District of Columbia Circuit ruled, 2 to 1, in favor of the plaintiff in a similar case, Halbig v. Burwell.... Now the opponents of Obamacare are asking the Supreme Court to immediately hear an appeal of the Richmond decision.... The law specifically instructed the secretary of health and human services to create and manage the exchanges for states that chose that option. And when the law was passed, everyone involved in the law’s passage understood that this directive vested federal exchanges with the same mission and authority as state-mandated exchanges.... Whatever one thinks of the Affordable Care Act, it is absurd to argue that its drafters intended to make insurance unaffordable."

Ricardo Hausmann: Why Are Growth Rates Converging Among Some and Diverging Among Others?: "When Adam Smith wrote The Wealth of Nations in 1776, per capita income in the world’s richest country--probably the Netherlands--was about four times that of the poorest countries. Two centuries later, the Netherlands was 40 times richer than China, 24 times richer than India, and ten times richer than Thailand. But, over the past three decades, the trend reversed. Now, the Netherlands is only 11 times richer than India and barely four times richer than China and Thailand.... Yet some countries are still diverging. While the Netherlands was 5.8, 7.7, and 15 times richer than Nicaragua, Côte D’Ivoire, and Kenya, respectively, in 1980, by 2012 it was 10.5, 21.1, and 24.4.... The economic expansion of the last two centuries has been based on an explosion of knowledge about what can be made, and how. An apt metaphor is a game of Scrabble.... Countries with few 'letters' lack incentives to accumulate more letters, because they cannot do much with any additional one: you would not want a TV remote control if you didn’t have a TV, and you would not want a TV broadcasting company if your potential customers lacked electricity. This trap becomes deeper the longer the alphabet and the longer the words..."

Duncan Black: Who Cares?: "I have theories, but I do get a bit puzzled by the intensity of general anti-immigrant (read: anti-latino immigrant) sentiment in this country. Not surprised that it exists, just surprise at the intensity of the issue in certain segments of the population. I'll switch back and forth between undocumented and documented immigrants a bit here probably, but what the hell could possibly motivate people to picket and scream at a bus full of refugee kids? On the flip side, here in the urban hellhole nobody seems to care. My fair city is hardly a shining example of racial harmony, but anti-immigrant sentiment appears to be incredibly muted. Of course it exists, it just doesn't seem to exist with any intensity in the city."

Kessler: Don't Be Fooled by Recent Hawkish Fed Commentary: "As we go into next week’s Fed meeting, the market has become consumed with the idea that the Fed funds rate may be raised earlier than the market expects.... A San Francisco Federal Reserve paper has pointed out that the Fed’s own expectations of when they will raise rates is on-average sooner than what the market... some Fed members have suggested it is time to remove a piece of language in the Fed statement promising a ‘considerable time' between the end of QE3 and the first rate rise.... The Fed’s own expectation of rate rises comes from a survey of the 16 FOMC participants.... Doing this math suggests that the Fed expects the Fed funds rate to be 1.20% by the end of 2015 but, the Fed Funds futures market is priced such that the Fed Funds rate will be 0.77% at the end of 2015, a difference of nearly two 0.25% rate hikes (0.43%). This is the crux of the SF Fed paper.... The markets are not simply unaware... the markets are... more dovish... because... Plosser... Lacker... and... Fisher... have wanted to raise rates with any excuse tracing back to 2008.... These three (and a few others), are afraid of something they have no evidence of (runaway inflation around any corner), and are too insulated from main street.... If the highest three votes in the Fed expectations survey are removed, the average Fed expectations align... with... the market.... The housing market has clearly rolled over, consumer spending hasn't shown life, and the all-important wage growth is lackluster. The mostly academic Fed is too smart to use the excuse of the ‘air’ of recovery to make a hawkish move. There is simply no reason for it.

Matthew C. Klein: Wealth effect may one day stop being so great for wealthy, says wealthy person

And Over Here:

A Brief Note on Texas "Hospitality": Watching Californian Kevin Drum Get Annoyed at Jay Nordlinger: Live from Caribou Coffee: September 11, 2014 (Brad DeLong's Grasping Reality...)
Over at Equitable Growth: IS-LM as "Obfuscation"? No: Thursday Focus for September 11, 2014 (Brad DeLong's Grasping Reality...)
Liveblogging World War II: September 11, 1944: FDR (Brad DeLong's Grasping Reality...)
"Trapped in the 'Dark Corners'"?: Thoughts on Olivier Blanchard's "Where Danger Lurks": The Honest Broker for the Week of September 12, 2014 (Brad DeLong's Grasping Reality...)
Over at Equitable Growth: What Is Special About Recessions in a "Monetary Economy": Trollng Nick Rowe (Brad DeLong's Grasping Reality...)
Over at Equitable Growth: Hoisted from the Weblog Archives, Reading Which Breaks My Heart, from Five Years Ago: Generating a Robust Recovery (Brad DeLong's Grasping Reality...)
Exorbitant Privilege, Debt Capacity, and the Eurozone: A Puzzle in Economic Theory (Brad DeLong's Grasping Reality...)

Should Be Aware of:

Bill Gardner: Tools for statistical writing and reproducible research: RStudio: RStudio | | R Markdown

 

Pierre-Cyrille Hautcoeur, Angelo Riva, and Eugene N. White: Banque de France’s 1889 ‘lifeboat’ bank rescue : "The key challenge for lenders of last resort... >...is to ameliorate financial crises without encouraging excessive risk-taking.... The lessons from the Banque de France’s successful handling of the crisis of 1889. Recognising its systemic importance, the Banque provided an emergency loan to the insolvent Comptoir d’Escompte. Banks that shared responsibility for the crisis were forced to guarantee the losses, which were ultimately recouped by large fines--notably on the Comptoir’s board of directors. This appears to have reduced moral hazard--there were no financial crises in France for 25 years..."

Simon Wren-Lewis: Types of Unemployment: "[In] Pascal Michaillat and Emmanuel Saez['s model]... the labour market has an identical search structure to the goods market.... As labour market tightness increases, any vacancy is less likely to result in a hire.... Profit maximisation determines capacity, not output. Output is influenced by capacity, but it is also influenced by aggregate demand. Now consider an increase in the aggregate demand for goods, caused by--for example--a reduction in the price level. That results in more visits to producers, which will lead to more sales.... This leads firms to want to increase their capacity, which means increasing employment.... This increases labour market tightness and reduces unemployment.... In this model unemployment can be of three ‘types’: classical (w too high), Keynesian (aggregate demand too low), but also frictional. This model can also generate four ‘regimes’.... We do not need to ask whether demand is greater or less than ‘supply’, but equally we do not presume that output is always independent of ‘supply’..."

Jed Lewison: McConnell campaign says aide at center of bribery scandal was paid nearly $500k to hold his nose: "Senate Minority Leader Mitch McConnell and his team aren't saying anything about... Jesse Benton amid a Ron Paul presidential campaign bribery scandal. But Joe Sonka flags one thing that they are saying—and why it's hilarious: 'Behind the scenes, McConnell’s campaign staff has tried selling journalists on the talking point that Benton wasn’t an important part of the campaign, and that his longtime aide Josh Holmes has been running the show. If that is true--and it might be--one has to ask why McConnell’s campaign committees and the Republican Party of Kentucky have paid Benton a salary of $458,000 for his work as campaign manager. In other words, explaining that you paid someone an extraordinary amount for a job that wasn’t very important is difficult when the person in question is at the center of a scandal where someone was bribed by a campaign for political support.' In fact, if it's true that McConnell paid Benton a half-million dollars for what amounted to a no-show job in which his only responsibility was preventing tea partiers from dethroning the five-term senator, doesn't that sound an awful lot like a bribe, or at a minimum, pay-to-play? I mean, in Benton's own words, he didn't like McConnell. He was just holding his nose—and getting a fat paycheck for doing so—until Rand Paul's 2016 presidential campaign. That actually raises another question: What promises, if any, did Mitch McConnell make to Rand Paul about 2016? Of course, now that Benton is gone, those promises are probably inoperative, which means not only is it questionable whether Benton will play any role in Paul's campaign, but it's almost certain that McConnell won't deliver whatever help that he promised to send Rand's way. That's the thing about making deals with liars and cheats: If they can break their word, they will."

Miles Kimball: Safe, Legal, Rare and Early: "Even after birth, loving parents feel a baby becoming more and more precious with every passing day. And with passing time, the child gains a greater and greater consciousness of its own existence, and (in all but pathological cases) its own strong desire to live. At the other end, even before conception, I like to think that even the unconceived have at least some small ethical interest in getting a chance to become an actual human being. So to me, there are no sudden ethical jumps, but instead, a gradually increasing ethical weight to a developing human life, at least from shortly before conception to shortly after birth..."

Charles Pierce: Here's Some Stupid For Lunch: "I hate to do it, but welcome to the Cafe, my man Chuck Todd.... In one of his first acts as the caretaker at journalism's Overlook Hotel... Chuck interviewed the president and... note the gotcha smirk on the screengrab... told the president that the latter had not mentioned the word "Syria" yet in the interview. Except, well, you can see this coming, right? 'THE PRESIDENT:... the schism between Sunni and Shia that has been fueling so much of the violence in Syria.... 'CHUCK TODD: You've not said the word, "Syria," so far in our conversation.'.... That, by the way, was the fourth time the president had mentioned Syria in the interview in which my man Chuck said he hadn't mentioned Syria at all. Rookie mistake. Could have happened to anyone. No, what gets my man Chuck the prime seat at this lunch counter is the clumsy little tap-dance he did to try and distract us from said mistake. 'CHUCK TODD: Part one of my interview there. Some of you may have noted that I said the president hadn't mentioned the word "Syria" at all in one of my questions. He had mentioned it, but he hadn't said whether he was taking military action there.' Dear lord, they're not even trying hard any more."

Over at Equitable Growth: IS-LM as "Obfuscation"? No: Thursday Focus for September 11, 2014

Over at Equitable Growth: Lars Syll reminds me of a snarky passage I have never approved of from Hyman Minsky:

Hyman Minsky: Minsky on the IS-LM obfuscation: "The glib assumption made by Professor Hicks...

...in his exposition of Keynes’s contribution that there is a simple, negatively sloped function, reflecting the productivity of increments to the stock of capital, that relates investment to the interest rate is a caricature of Keynes’s theory of investment... which relates the pace of investment not only to prospective yields but also to ongoing financial behavior.... The conclusion to our argument is that the missing step in the standard Keynesian theory was the explicit consideration of capitalist finance within a cyclical and speculative context... then the full power of the revolutionary insights and the alternative frame of analysis that Keynes developed becomes evident.... The greatness of The General Theory was that Keynes visualized [the imperfections of the monetary-financial system] as systematic rather than accidental or perhaps incidental attributes of capitalism.... Only a theory that was explicitly cyclical and overtly financial was capable of being useful... READ MOAR

I have always thought that this and similar were both short-sighted and unfair. Short-sighted, in that it is not Hicks who would be Minsky's long-run intellectual adversary but rather Freidman, Lucas, and Hayek, and so building bridges to the Hicksians ought to be a very high priority. Unfair, in that if you want to lead someone from classical pre-Keynesian macro to Minskyism, you start by saying:

Classical pre-Keynesian macro has a vertical LM curve and a stable IS curve.
Minskyite macro has a relatively flat LM curve and a wildly unstable IS curve driven by expectations, leverage, positive-feedback and the rest.

You can then drop the (dynamic) Minskyite apparatus into the determinants of the current (static) location of the IS curve, and you have a theory. As Charles Kindleberger liked to put it, more eloquently and clearly than Minsky ever did:

Charles Kindleberger: Anatomy of a Typical Financial Crisis: We start with the model of the late Hyman Minsky, a man with a reputation among monetary theorists for being particularly pessimistic, even lugubrious, in his emphasis on the fragility of the monetary system and its propensity to disaster. Although Minsky was a monetary theorist rather than an economic historian, his model lends itself effectively to the interpretation of economic and financial history. Indeed, in its emphasis on the instability of the credit system, it is a lineal descendant of a model, set out with personal variations, by a host of classical economists including John Stuart Mill, Alfred Marshall, Knut Wicksell, and Irving Fisher. Like Fisher, Minsky attached great importance to the role of debt structures in causing financial difficulties, and especially debt contracted to leverage the acquisition of speculative assets for subsequent resale.

According to Minsky, events leading up to a crisis start with a "displacement," some exogenous, outside shock to the macroeconomic system. The nature of this displacement varies from one speculative boom to another. It may be the outbreak or end of a war, a bumper harvest or crop failure, the widespread adoption of an invention with pervasive effects--canals, railroads, the automobile--some political event or surprising financial success, or debt conversion that precipitously lowers interest rates. An unanticipated change of monetary policy might constitute such a displacement and some economists who think markets have it right and governments wrong blame "policy-switching" for some financial instability.

But whatever the source of the displacement, if it is sufficiently large and pervasive, it will alter the economic outlook by changing profit opportunities in at least one important sector of the economy. Displacement brings opportunities for profit in some new or existing lines and closes out others. As a result, business firms and individuals with savings or credit seek to take advantage of the former and retreat from the latter. If the new opportunities dominate those that lose, investment and production pick up. A boom is under way.

In Minsky’s model, the boom is fed by an expansion of bank credit that enlarges the total money supply. Banks typically can expand money, whether by the issue of bank’s notes under earlier institutional arrangements or by lending in the form of addictions to bank deposits. Bank credit is, or at least has been, notoriously unstable, and the Minsky model rests squarely on that fact. This feature of the Minsky model is incorporated in what follows, but we go further. Before banks had evolved, and afterward, additional means of payment to fuel a speculative mania were available in the virtually infinitely expansible nature of personal credit. For a given banking system at a given time, monetary means of payment may be expanded not only within the existing system of banks but also by the formation of new banks, the development of new credit instruments, and the expansion of personal credit outside of banks. Crucial questions of policy turn on how to control all these avenues of monetary expansion. But even if the instability of old and potential new banks were corrected, instability of personal credit would remain to provide means of payment to finance the boom, given a sufficiently throughgoing stimulus.

Let us assume, then, that the urge to speculate is present and transmuted into effective demand for goods or financial assets. After a time, increased demand presses against the capacity to produce goods or the supply of existing financial assets. Prices increase, giving rise to new profit opportunities and attracting still further firms and investors. Positive feedback develops, as new investment leads to increases in income that stimulate further investment and further income increases. At this stage we may well get what Minsky called "euphoria." Speculation for price increases is added to investment for production and sale. If this process builds up, the result is often, though not inevitably, what Adam Smith and his contemporaries called "overtrading."

Now, "overtrading" is by no means a clear concept. It may involve pure speculation for a price rise, an overestimate of prospective returns, or excessive "gearing." Pure speculation, of course involves buying for resale rather than use in the case of comodities or for resale rather than income in the case of financial assets. Overestimation of profits comes from euphoria, affects firms engaged in the production and distributive processes, and requires no explanation. Excessive gearing arises from cash requirements that are low relative both to the prevailing price of a good or asset and to possible changes in its price. It means buying on margin, or by installments, under circumstances in which one can sell the asset and transfer with it the obligation to make future payments.

As firms or households see others making profits from speculative purchases and resales, they tend to follow: "Monkey see, monkey do." In my talks about financial crisis over the last decades, I have polished one line that always gets a nervous laugh:

There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.

When the number of firms and households indulging in these practices grows large, bringing in segments of the population that are normally aloof from such ventures, speculation for profit leads away from normal, rational behavior to what has been described as "manias" or "bubbles." The word mania emphasizes the irrationality; bubble foreshadows the bursting. In the technical language of some economists, a bubble is any deviation from "fundamentals," whether up or down, leading to the possibility and even the reality of negative bubbles, which rather gets away from the thrust of the metaphor. More often small price variations about fundamental values (as prices) are called "noise." In this book, a bubble is an upward price movement over an extended range that then implodes. An extended negative bubble is a crash.

As we shall see in the next chapter the object of speculation may vary widely from one mania or bubble to the next. It may involve primary products, especially those imported from afar (where the exact conditions of supply and demand are not known in detail), or goods manufactured for export to distant markets, domestic and foreign securities of various kinds, contracts to buy or sell goods or securities, land in the country or city, houses, office buildings, shopping centers, condominiums, foreign exchange. At a late stage, speculation tends to detach itself from really valuable objects and turn to delusive ones. A larger and larger group of people seeks to become rich without a real understanding of the processes involved. Not surprisingly, swindlers and catchpenny schemes flourish.

Although Minsky’s model is limited to single country, overtrading has historically tended to spread from one country to another. The conduits are many. Internationally traded commodities and assets that go up in price in one market will rise in others through arbitrage. The foreign-trade multiplier communicates income changes in a given country to others through increased or decreased imports. Capital flows constitute a third link. Money flows of gold, silver (under gold standard or bimetallism), or foreign exchange are a fourth. And there are purely psychological connections, as when investor euphoria or pessimism in one country infects investors in others. The declines in prices on October 24 and 29, 1929, and October 19, 1987, were practically instantaneous in all financial markets (except Japan), far faster than can be accounted for by arbitrage, income changes, capital flows, or money movements.

Observe with respect the money movements that in an ideal world, a gain of specie for one country would be matched by a corresponding loss for another, and the resulting expansion in the first case would be offset by the contraction in the second. In the real world, however, while the boom in the first country may gain speed from the increase in the supply of reserves, or "high-powered money," it may also rise in the second, despite the loss in monetary reserves, as investors respond to rising prices and profits abroad by joining in the speculative chase. In other words, the potential contraction from the shrinkage on the monetary side may be overwhelmed by the increase in speculative interest and the rise in demand. For the two countries together, in any event, the credit system is stretched tighter.

As the speculative boom continues, interest rates, velocity of circulation, and prices all continue to mount. At some stage, a few insiders decide to take their profits and sell out. At the top of the market there is hesitation, as new recruits to speculation are balanced by insiders who withdraw. Prices begin to level off. There may then ensue an uneasy period of "financial distress." The term comes from corporate finance, where a firm is said to be in financial distress when it must contemplate the possibility, perhaps only a remote one, that it will not be able to meet its liabilities.

For an economy as a whole, the equivalent is the awareness on the part of a considerable segment of the speculating community that a rush for liquidity--to get out of other assets and into money--may develop, with disastrous consequences for the prices of goods and securities, and leaving some speculative borrowers unable to pay off their loans. As distress persists, speculators realize, gradually or suddenly, that the market cannot go higher. It is time to withdraw. The race out of real or long-term financial assets and into money may turn into a stampede.

T>he specific signal that precipitates the crisis may be the failure of a bank or firm stretched too tight, the revelation of a swindle or defalcation by someone who sought to escape distress by dishonest means, or a fall in the price of the primary object of speculation as it, at first alone, is seen to be overpriced. In any case, the rush is on. Prices decline. Bankruptcies increase. Liquidation sometimes is orderly but may degenerate into panic as the realization spreads that there is only so much money, not enough to enable everyone to sell out at the top.

The word for this state--again, not from Minsky--is revulsion. Revulsion against commodities or securities leads banks to cease lending on the collateral of such assets. In the early nineteenth century this condition was known as discredit. Overtrading, revulsion, discredit—-all these terms have a musty, old-fashion flavor. They are imprecise, but they do convey a graphic picture.

Revulsion and discredit may go so far as to lead to panic (or as the Germans put it, Torschlusspanik. "door-shut-panic"), with people crowding to get through the door before it slams shut. The panic feeds on itself, as did the speculation, until one or more of three things happen:

prices fall so low that people are again tempted to move back into less liquid assets;

trade is cut off by setting limits on price declines, shutting down exchanges, or otherwise closing trading; or

a lender of last resort succeeds in convincing the market that money will be made available in sufficient volume to meet the demand for cash.

Confidence may be restored even if a large volume of money is not issued against other assets; the mere knowledge that one can get money is frequently sufficient to moderate or eliminate the desire.

Whether there should be a lender of last resort is a matter of some debate. Those who oppose the function argue that it encourages speculation in the first place. Supporters worry more about the current crisis than about forestalling some future one. There is also a question of the place for an international lender of last resort. In domestic crises, government or the central bank (when there is one) has responsibility. At the international level, there is neither a world government nor any world bank adequately equipped to serve as a lender of last resort, although some would contend that the International Monetary Fund since Bretton Woods in 1944 is capable of discharging the role.

Dilemmas, debates, doubts, questions abound. We shall have more to say about these questions later on.

That the Minsky Cycle has its proper place as a--major--piece in the IS-LM mechanism is, I think, important. Right now one major current in the macroeconomic policy debate is the stream fed by the BIS's insistence that curbing "speculation" requires that interest rates rise soon, and that this can be done without (much) damage to the real economy and that in fact such interest rate rises will effectively control "speculation". This is, in its essentials, an insistence that the LM curve is (nearly) vertical (so that damage to the real economy will be small) and that fluctuations in the IS curve are (relatively) minor (so that small increases in interest rates will rebalance the economy. The most effective counters to this argument are Hicksian ones: that the LM curve is not steep but relatively flat, and that swings in the IS curve are potentially large and need to be managed by other tools that act to damp those swings directly rather than merely offset them via interest rate-driven movements along the IS curve.

And this is not an argument that Minskyites who do not know or do not use the Hicksian IS-LM can effectively make.

Liveblogging World War II: September 11, 1944: FDR

FDR: Day by Day:

12:30am: FDR's train crossed the border at Rouse's Point, NY. At 0130 they were joined by a detail of four Royal Canadian Mounted Police who would accompany them to Quebec City, P. Q. and back from Quebec City, P. Q. to the border.

9:00am: FDR's train arrived at Wolfe's Cove station which is on the banks of the St. Lawrence River just below the Plains of Abraham.

9:45am: The Governor General of Canada (The Earl of Athlone), Her Royal Highness Princess Alice (The Countess of Athlone), and the Right Honorable William L. Mackenzie King (Prime Minster of Canada) called on FDR on his train.

10:00am: Prime Min. Churchill's train pulled up at Wolfe's Cove station. FDR's party and Prime Min. Winston S. Churchill's party exchanged greetings. Accompanying Winston S. Churchill were Lord Moran (Winston S. Churchill's private physician), Lord Leathers (Minister of War), Lord Cherewell (British Paymaster General); Adm. of the Fleet Sir Andrew B. Cunningham, First Sea Lord Field; Marshal Sir Alan F. Brooke, Chief of Imperial General Staff; Sir Charles Portal, Chief of Air Staff; Gen. Sir Hastings L. Ismay, Chief of Staff to Prime Min. Winston S. Churchill as Minister of Defense; and Maj. Gen. R. E. Laycock, Chief of Combined Operations.

10:25am: FDR and Prime Min. Churchill arrived at the Citadel. Here FDR was officially received into Canada. A composite guard of honor of approximately 150 men, made up of equal detachments of Royal Canadian Navy, Army, and Air Force personnel was drawn up on the parade ground. News photographers and members of the press, some one hundred strong were present at the ceremonies.

1:30pm: FDR, Prime Min. Winston S. Churchill, ER, Mrs. Churchill and Prime Min. William L. Mackenzie King were luncheon guests of the Gov. Gen. Earl of Athlone and Princess Alice at the Citadel.

3:00pm: FDR and Prime Min. Winston S. Churchill met in FDR's Map Room to review the latest news of the war.

4:30pm: Ray Atherton, United States Ambassador to Canada, called on FDR.

8:30pm: FDR, ER, attended a viceregal dinner at the Citadel as guests of the Gov. Gen. Earl of Athlone and Her Royal Highness Princss Alice. The guest list also included Prime Min. and Mrs. Churchill; Prime Min. William L. Mackenzie King; Cardinal Villeneuve; Right Reverend Phillip Carrington, Anglican Archbishop of Quebec; Premier Duplessis of Quebec; Ray Atherton and Mrs. Atherton; Adm. William D. Leahy, Gen. George C. Marshall, Gen. Henry H. Arnold, Adm. Ernest J. King, Stephen T. Early; Lt. Gen. B. B. Somervell, Commanding General, Army Service Forces; Rear Adm. Wilson Brown; Vice Adm. Ross T. McIntire; Maj. Gen. Edwin M. Watson; Miss Malvina Thompson; Right Honorable Malcolm MacDonald, United Kingdom High Commissioner to Canada; Adm. of the Fleet Sir Andrew B. Cunningham; Field Marshal Sir Alan Brooke; Marshal of the Royal Air Force Sir Charles Portal; Maj. Gen. R. Laycock; Gen. Sir Hastings L. Ismay; Field Marshal Sir John Dill, Chief of the British Joint Staff Mission to the United States; Adm. Sir Percy Noble; Lt. Gen. G. N. Macready; Air Marshal Sir William Welsh; Lord Cherwell; Comdr. C. R. Thompson, Naval Aide to Prime Min. Winston S. Churchill; John Martin, Secretary to Prime Min. Winston S. Churchill; Sir Eugene Fiset, Lt. Gov. of Quebec and Lady Fiset; Dr. E. H. Coleman, Canadian Under-Secretary of State; the Canadian Chiefs of Staff Air Marshal R. Leckie, Lt. Gen. J. C. Murchie, and Vice Adm. G. C. Jones; Maj. Gen. Maurice Pope, Military Aide to Prime Min. Winston S. Churchill; and Col. D. B. Papineau, Aide to Prime Min. William L. Mackenzie King.
Quebec, Canada

11:00pm: Retired

"Trapped in the 'Dark Corners'"?: Thoughts on Olivier Blanchard's "Where Danger Lurks": The Honest Broker for the Week of September 12, 2014

Over at Equitable Growth: "Trapped in the 'Dark Corners'"?: Thoughts on Olivier Blanchard's "Where Danger Lurks"

Olivier Blanchard, inveighing against "ergodicity" and "linearity" as assumptions, sounds like some post-Keynesian from the 1980s. They were right then. He is right now:

Olivier Blanchard: Where Danger Lurks: "One has to go back to the so-called rational expectations revolution...

...What was new was the development of techniques to solve models under the assumption that people and firms did the best they could in assessing the future. (A glimpse into why this was technically hard: current decisions by people and firms depend on their whole expected future. But their whole expected future itself depends in part on current decisions.) These techniques... made sense only... [if] economic fluctuations were regular enough so that, by looking at the past, people and firms (and the econometricians)... could understand their nature and form expectations... and simple enough so that small shocks had small effects.... Thinking about macroeconomics was largely shaped by those assumptions....

Blanchard continues:

The state of the... economic world provided little impetus for... question[ing].... That small shocks could sometimes have large effects and, as a result, that things could turn really bad, was not completely ignored.... But such an outcome was thought to be a thing of the past that would not happen again, or at least not in advanced economies thanks to their sound economic policies...

That we will assume linearity and ergodicity as convenient to build models we can solve is a not unreasonable modeling strategy to carry you forward.

What is unreasonable is to presume that the place where that modeling strategy stops tells you about the world. Yet that is what a great many economists have done for two generations. Blanchard sees these modeling assumptions as one factor supporting the "Great Moderation" conclusions that:

bank runs... [were of little concern because] the introduction of bank deposit insurance had largely eliminated the problem.... Central banks could quickly provide liquidity.... Sudden stops—episodes when capital flows to a country dry up and all investors try to get out at once—could not be ignored either.... But they were thought to be an issue for emerging markets [only]...

and not for developed economies, in which central banks could print as much of the safe and liquid asset of hard-currency cash as the sudden stoppers desired. Thus, during the "Great Moderation":

issues of liquidity... were not seen as central.... The probability that central banks would want to decrease nominal interest rates below zero and be unable to do so... was seen as very small.... In short, the notion that small shocks could have large adverse effects, or could result in long and persistent slumps, was not perceived as a major issue. We all knew that there were “dark corners”.... But we thought we were far away from those corners.... Japan sat unhappily in that picture.... But its situation was often interpreted as the result of misguided policies....

As I look back, it still seems to me that in some sense this train of thought ought to be correct.

Regulators understood the moral hazard created by deposit insurance. They also understood the other two moral hazard points of vulnerability: limited liability at the corporate level, and limited liability at the individual level created by richly-funded options-based compensation schemes. From that starting point it ought to have been straightforward to guard against systemic risk. Moreover, even should systemic risk not be properly guarded against, and even should it have macroeconomic consequences, policymakers were far from helpless. Fiscal Policy. Standard monetary policy. Non-standard monetary policy. Banking policy--both to recapitalize the banks and restart the credit channel and via loan guarantees to support a much larger volume of investment spending with the limited risk-bearing capacity the impaired credit channel could mobilize.

With prudent surveillance and proper attention to the hot-money funding sources of the shadow banks, appropriate regulation would have kept us from visiting a "dark corner" in the first place. With appropriate--expansionary--standard and non-standard monetary policy, fiscal policy, and banking-sector lender-of-last-resort and loan-resolution deleveraging and -guarantee policy, we would have quickly exited the "dark corner". We did not.

Blanchard says:

The main lesson of the crisis is that we were much closer to those dark corners than we thought--and the corners were even darker than we had thought too.... In this environment, economic policy--especially monetary policy--has taken on an element of black magic....

Monetary policy does indeed have an element of black magic to it at the zero lower bound. But fiscal policy--at least for sovereigns possessing exorbitant privilege--does not: one borrows money and buys stuff, and if that causes expected currency depreciation and rising interest rates then monetary-policy loses its black-magic aspect. And loan-resolution deleveraging and loan-guarantee policies to fix and support an impaired credit channel remain available as well.

The most curious question is why these policy levers were not used: who would have thought back in 2007 that the net policy response to the biggest demand shock in the United States since at least the Great Depression would be to cut government spending as a share of GDP, leave housing finance in benign neglect, and keep monetary policy at a gauge that would lead to a 2014 PCE price level 4% lower than had been firmly anticipated back in 2007?

Blanchard says absolutely nothing about this puzzle, and leaves untouched the roles of the economic research, economic policy analysis, and economic policymaking communities in this failure of response.

What does he say? This: He calls for more aggressive prudential regulation and higher capital requirements:

The crisis has one obvious policy implication: Authorities should make it one of the major objectives of policy—macroeconomic, financial regulatory, or macroprudential—to stay further away from the dark corners. We are still too close.... If the financial system had been less opaque, if capital ratios had been higher, there might still have been a housing bust in the United States in 2007–08. But the effects would have been limited.... The reality of financial regulation is that new rules open new avenues for regulatory arbitrage.... Staying away from dark corners will require continuous effort, not one-shot regulation....

And he calls for not the 5%/year inflation target that Larry Summers and I mused about back in 1992 but for a 4%/year inflation target:

If nominal rates had been higher before the crisis, monetary policy’s margin to maneuver would have been larger. If inflation and nominal interest rates had been, say, 2 percentage points higher before the crisis, central banks would have been able to decrease real interest rates by 2 more percentage points before hitting the zero lower bound on nominal interest rates. These additional 2 percentage points are not negligible....

And he calls for an opening up of the economic-research community:

Turning from policy to research, the message should be to let a hundred flowers bloom.... But this answer skirts a harder question: How should we modify our benchmark models—the so-called dynamic stochastic general equilibrium (DSGE) models that we use, for example, at the IMF to think about alternative scenarios and to quantify the effects of policy decisions? The easy and uncontroversial part of the answer is that the DSGE models should be expanded to better recognize the role of the financial system—and this is happening. But should these models be able to describe how the economy behaves in the dark corners?

And then comes a turn in the argument I simply do not understand:

Let me offer a pragmatic answer. If macroeconomic policy and financial regulation are set in such a way as to maintain a healthy distance from dark corners, then our models that portray normal times may still be largely appropriate...

But... but... but... Macroeconomic policy and financial regulation are not set in such a way as to maintain a healthy distance from dark corners. We are still in a dark corner now. There is no sign of the 4% per year inflation target, the commitments to do what it takes via quantitative easing and rate guidance to attain it, or a fiscal policy that recognizes how the rules of the game are different for reserve currency printing sovereigns when r < n+g. Thus not only are we still in a dark corner, but there is every reason to believe that should we get out the sub-2% per year effective inflation targets of North Atlantic central banks and the inappropriate rhetoric and groupthink surrounding fiscal policy makes it highly likely that we will soon get back into yet another dark corner. Blanchard's pragmatic answer is thus the most unpragmatic thing imaginable: the "if" test fails, and so the "then" part of the argument seems to me to be simply inoperative. Perhaps on another planet in which North Atlantic central banks and governments aggressively pursued 6% per year nominal GDP growth targets Blanchard's answer would be "pragmatic". But we are not on that planet, are we?

Moreover, even were we on Planet Pragmatic, it still seems to be wrong. Using current or any visible future DSGE models for forecasting and mainstream scenario planning makes no sense: the DSGE framework imposes restrictions on the allowable emergent properties of the aggregate time series that are routinely rejected at whatever level of frequentist statistical confidence that one cares to specify. The right road is that of Christopher Sims: that of forecasting and scenario planning using relatively instructured time-series methods that use rather than ignore the correlations in the recent historical data. And for policy evaluation? One should take the historical correlations and argue why reverse-causation and errors-in-variables lead them to underestimate or overestimate policy effects, and possibly get it right. One should not impose a structural DSGE model that identifies the effects of policies but certainly gets it wrong. Sims won that argument. Why do so few people recognize his victory?

Blanchard continues:

Another class of economic models, aimed at measuring systemic risk, can be used to give warning signals that we are getting too close to dark corners, and that steps must be taken to reduce risk and increase distance. Trying to create a model that integrates normal times and systemic risks may be beyond the profession’s conceptual and technical reach at this stage...

For the second task, the question is: whose models of tail risk based on what traditions get to count in the tail risks discussion?

And missing is the third task: understanding what Paul Krugman calls the "Dark Age of macroeconomics", that jahiliyyah that descended on so much of the economic research, economic policy analysis, and economic policymaking communities starting in the fall of 2007, and in which the center of gravity of our economic policymakers still dwell.

Exorbitant Privilege, Debt Capacity, and the Eurozone: A Puzzle in Economic Theory

How different are reserve-currency issuing sovereigns with exorbitant privilege?

With the exception of the Great Contraction of 1929-1933, ever since 1914 with the beginning of World War I--no, ever since 1896 and the full-scale exploitation of the gold mines of the Witwatersrand--the rate of interest on the world's fundamental monetary security, the bonds of the sovereign or four whose assets serve as global reserves, has invariably been less than the growth rate of the global economy's potential output, and has often in real terms been less than zero. The deflation of 1929 to 1933 will never come again.

Thus we now have 12 decades of experience of operating in international macroeconomic environment in which it is the exorbitant privilege of the world's reserve currency-printing sovereigns not to have a government budget constraint--or perhaps not to have a government budget constraint as long as they do not use their privilege so much as to lose their reserve-currency status.

You would think that by now, after twelve decades, the dominant strain of thought in international macroeconomics would have incorporated this empirical regularity of exorbitant privilege into their models. To transfer a modicum, or perhaps more than a modicum, of debt off of the books of periphery governments and onto the books of reserve currency-printing sovereigns is a free lunch that we should be taking much more advantage of. But no.

I was going to write a piece explaining why the dominant view in international macro is what it is. But I can't. So let me give up and declare analytical bankruptcy. Can anybody tell me why moving large amounts of debt onto the books of the reserve currency-issuers is not a no-brainer that has already been done?

Cf. Ken Rogoff:

Kenneth Rogoff: Economic Recovery Require Debt Restructuring or Rescheduling: "Eurozone leaders continue to debate how best to reinvigorate economic growth....

...Meanwhile, the leaders of the eurozone’s northern member countries continue to push for more serious implementation of structural reform. Ideally, both sides will get their way, but it is difficult to see an endgame that does not involve significant debt restructuring or rescheduling.... In general, neither pure austerity nor crude Keynesian stimulus can help countries escape high-debt traps.... debt rescheduling, inflation, and various forms of wealth taxation (such as financial repression), have typically played a significant role. It is hard to see how European countries can indefinitely avoid recourse to the full debt toolkit, especially to repair the fragile economies of the eurozone’s periphery.

The ECB’s expansive “whatever it takes” guarantee may indeed be enough to help finance greater short-term stimulus than is currently being allowed; but the ECB’s guarantee will not solve long-run sustainability problems. Indeed, the ECB will soon have to confront the fact that structural reforms and fiscal austerity fall far short of being a complete solution to Europe’s debt problems. In October and November, the ECB will announce the results of its bank stress tests. Because many banks hold a large volume of eurozone government debt, the results will depend very much on how the ECB assesses sovereign risk. If the ECB grossly understates the risks, its credibility as a regulator will be badly tarnished. If it is more forthright about the risks, there is a chance that some periphery countries might have difficulty plugging the holes, and will require help from the north. One hopes that the ECB will be forthright. It is high time for a conversation on debt relief for the entire eurozone periphery...