J. Bradford DeLong's Blog, page 198

This Identity Politics Stuff is Killing America...

There is an argument that somebody who has built a food-processing and consumer-service business and met its payroll���like Herman Cain���should be on the Board of Governors of the Federal Reserve, in order to keep the staff and the other Governors reality-based in the sense that it would force them to explain themselves to somebody whose experience is in the real and not the financial economy. There is no argument that Herman Cain is the best businessman for the slot.

There is no argument at all that Stephen Moore���whose qualification is having played an economist on TV, and being willing to dump whatever of his previous policy positions (free trade? TPP? gold standard? anything else?) over the side whenever his political masters demand���belongs on the Fed.

The pro-Moore pro-Cain pieces that are currently being planted are reduced to closing with "Moore and Cain would only be two of 12 FOMC votes". But Republicans���save Greg Mankiw and Ross Douthat���are in lockstep behind them. Well���almost in lockstep. Herman Cain is the stronger (not strong) candidate. Republican Senators Kevin Cramer (ND), Lisa Murkowski (AK), Cory Gardner (CO), and Mitt Romney (UT) are for Moore and against Cain.

This identity politics stuff is killing America:

Jim Bianco: The Fed Would Benefit from Stephen Moore, Herman Cain: "Policymaking positions should help determine policy, not act as a rubber stamp for the staff or Chairman. They should hold divergent views, come from different backgrounds and be ready to explain themselves. Policy makers should be given the resources to flesh out their ideas. If confirmed, Moore and Cain would only be two of 12 FOMC votes. Their unique perspectives could make the Fed a stronger institution...

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HA HA HA HA HA HA!!!!! If you have no rules-of-origin che...

HA HA HA HA HA HA!!!!! If you have no rules-of-origin checks, no tariffs, and no quotas vis-a-vis the EU, then your trade policy is not independent from the EU's, but is the EU's. It does not work any other way: Theresa May: All My Base Is Dumber than Donald Trump: "We want to obtain the benefits of a customs union���no tariffs, no rules of origin checks and no quotas -- while being able to operate our own independent trade policy...

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Barry Eichengreen, Arnaud Mehl, and Livia Chit��u: Mars o...

Barry Eichengreen, Arnaud Mehl, and Livia Chit��u: Mars or Mercury Redux: The Geopolitics of Bilateral Trade: "The pre-World War I period... whether trade agreements are governed by pecuniary factors... or by geopolitical factors.... We find that defense pacts boost the probability of trade agreements by as much as 20 percentage points. Our estimates imply that were the U.S. to alienate its geopolitical allies, the likelihood and benefits of successful bilateral agreements would fall significantly. Trade creation from an agreement between the U.S. and E.U. countries would decline by about 0.6 percent of total U.S. exports...

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I would put this more strongly. Trump and the Trumpists h...

I would put this more strongly. Trump and the Trumpists have absolutely no idea what they should be doing or are doing with respect to U.S.-China economic relations. And it shows: Tom Mitchell: Trump Had a Chance to Gain Greater Leverage Over China But Blew It: "Last spring a senior US executive complained to a government official about President Donald Trump���s... tariffs on imports from China.... The official had a pointed response: what leverage would the executive use to change Chinese approaches that have frustrated US businesses for decades, from forced technology transfers to state-directed industrial policies?... The executive had a three-letter answer: TPP, referring to the Trans-Pacific Partnership trade pact from which the US withdrew on Mr Trump���s first day in office...

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Marcella Alsan (2015): The Effect of the TseTse Fly on Af...

Marcella Alsan (2015): The Effect of the TseTse Fly on African Development: "The TseTse fly is unique to Africa and transmits a parasite harmful to humans and lethal to livestock. This paper tests the hypothesis that the TseTse reduced the ability of Africans to generate an agricultural surplus historically. Ethnic groups inhabiting TseTse-suitable areas were less likely to use domesticated animals and the plow, less likely to be politically centralized, and had a lower population density. These correlations are not found in the tropics outside of Africa, where the fly does not exist. The evidence suggests current economic performance is affected by the TseTse through the channel of precolonial political centralization...

#noted #economichistory

Phil Koop

Comment of the Day: "It is not only crows and chimpanzees that have a 'theory of mind'-people do too!": Phil Koop: "Well thank goodness I am not the only one who feels this way! Far too much is made, in my opinion, of the [Scott Sumner's] banal observation that we can never know what someone else is thinking. This is speciously true - we can never be certain of the entirety of another's thoughts. But it is substantively false, once you allow as you ought for probable inference; we can often make a pretty good guess on salient points of interest. It is not only crows and chimpanzees that have a 'theory of mind'-people do too! And some of us are pretty good at it; we can be quite sure of this because they tend to do things like consistently win a lot of money at poker. Certainly we do not need to be telepaths to judge Moore's or Cain's motives...

#commentoftheday

Robert Waldmann: Robert Waldmann: "The wedge comes from 2...

Robert Waldmann: Robert Waldmann: "The wedge comes from 2 types of irrationality. Poor portfolio diversification means the portfolio held by actual investors has high risk per return compared to the market portfolio. And also irrational loss aversion...

...But I also don't think the source of the wedge matters much.

The crude Mehra-Prescott calculation is interesting. It could be that the equity premium is high because of irrationality, and it could be that it is high because of liquidity constraints and other frictions. But in either case, considering the return a rational representative agent would accept is interesting. The premium minus what it would be if there were a rational representative agent describes the welfare effect of a sovereign wealth fund on welfare. This is John Quiggin's point and it is very important. That is the 64 trillion dollar question.

Why the policy would cause a huge increase in welfare is less important than the fact that such a policy exists, is simple, and can be implemented.

So next step is we look at a state which issued debt and buys the risky asset. The math is fairly simple and works for an OLG model with rational agents in the same way it works for a model of a representative but very stupid agent.

Notice that the leveraged state doesn't have to worry about interest rate spikes. If its debt is short term, it can respond to a loss of public confidence by liquidating its portfolio. In simple models, there aren't multiple equilibria.

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NIMPS! Clark Kerr is supposed to have said that the life ...

NIMPS! Clark Kerr is supposed to have said that the life of a Berkeley Chancellor is easy as long as: (1) the students are having enough sex, (2) the alumni are watching enough football, and (3) the faculty have enough parking.

Now Carol Christ is discovering the consequences of what happens when (3) is not satisfied. And it is dire: the prospective tear-down of the 350-space Upper Hearst Parking Structure looms...

And why don't people like the "Foothill" parking lot? Sather Gate is about 300 feet above sea level, Upper Hearst about 400 feet, and Foothill about 600 feet: Carol Christ: An Update on the Upper Hearst Project: "The campus��� plan to develop faculty housing and academic space on the site of the Upper Hearst parking lot is generating legitimate concerns and questions.... We continue to engage with our colleagues at the College of Engineering and the Goldman School of Public Policy.... We need to do a better job disseminating information about the project and its impacts.... We are sharing with all members of the Academic Senate the note below that was recently sent to the College of Engineering faculty by the Provost.... We will publish and distribute a comprehensive FAQ... provide ample opportunity for��comment and feedback...

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Dotting i's and Crossing t's with Respect to Olivier Blanchard's "Secular Stagnation" Fiscal-Policy-in-an-Era-of-Low-Interest-Rates AEA Presidential Address

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There are a lot of other issues Blanchard considers, or that I think should be considered. In my estimation of their rough order of importance:

Where does the wedge between the Treasury interest rate and the average profit rate come from, and what are the implications of that wedge's origins?

How and why does the average profit rate overestimate or underestimate the societal returns from investing in capital?

What are the risks that interest rates will spike?

What are the possibilities for using financial repression to control interest rate spikes?

How does the level of the debt affect the possibilities for multiple equilibria?

#monetarypolicy #monetaryeconomics #fiscalpolicy #mcroe #highlighted

I have been dinking around thinking about minor points in...

I have been dinking around thinking about minor points in Olivier Blanchard's excellent AEA presidential address, which focused on whether and when it is the relationship of the economy's growth rate to the safe government-bond interest or to the risky average profit rate that defines whether more government debt is good or bad. Blanchard's is an important and valid question. But that discussion is predicated on the assumption that the spread between the safe government-bond interest and the risky average profit rate makes sense as a risk premium. And whether or not it does���and if it does, how it works���are the big and important questions in this literature.

Study and learn from Blanchard, by all means���you can learn a lot. But keep in mind that you are ignoring the elephant in the room Olivier Blanchard: Public Debt and Low Interest Rates: "The lecture focuses on the costs of public debt when safe interest rates are low.... The current U.S. situation in which safe interest rates are expected to remain below growth rates for a long time, is more the historical norm than the exception.... Put bluntly, public debt may have no fiscal cost.... Even in the absence of fiscal costs, public debt reduces capital accumulation... [but] welfare costs may be smaller than typically assumed... [because] the safe rate is the risk-adjusted rate of return on capital. If it is lower than the growth rate, it indicates that the risk-adjusted rate of return to capital is in fact low...

...I look at the evidence on the average risky rate, i.e. the average marginal product of capital. While the measured rate of earnings has been and is still quite high, the evidence from asset markets suggests that the marginal product of capital may be lower, with the difference reflecting either mismeasurement of capital or rents. This matters for debt: The lower the marginal product, the lower the welfare cost of debt.

I discuss a number of arguments against high public debt, and in particular the existence of multiple equilibria where investors believe debt to be risky and, by requiring a risk premium, increase the fiscal burden and make debt effectively more risky. This is a very relevant argument, but it does not have straightforward implications for the appropriate level of debt. My purpose in the lecture is not to argue for more public debt, especially in the current political environment. It is to have a richer discussion of the costs of debt and of fiscal policy than is currently the case...

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