J. Bradford DeLong's Blog, page 2079

Tim Duy: Commodity Shock

TD:

Commodity Shock: How quickly the world can change.  Just a few weeks ago, incoming data suggested room for optimism.... The rapidly evolving situation in the Middle East, however, threatens to unsettle this positive momentum as oil prices surge.  Unfortunately, the suddenly choppy economic waters catch US monetary policymakers off guard, and it shows in recent Fedspeak.  It appears that the Fed is stuck between two narratives, one in which the energy price shock turns inflationary given signs of economic improvement in recent months, and another in which oil undermines a still-nascent recovery.  It is an unfortunate debate to have during this period of uncertainty and this early in the recovery....

I think it is somewhat silly to be discussing an early end to the LSAP as it only adds another layer of uncertainty on what was already an increasingly uncertain environment.  Somewhat pointless as well – the end is fast approaching in any event.   Indeed, I find the debate disappointing, albeit expected.  Policymakers appear to have learned little from their failed exercise in hawkishness this time last year.

What should be our baseline expectation for policy at this juncture?  First, the current LSAP policy concludes as planned, at least in magnitude.  They could choose a more gradual end to the policy, but I am hard pressed to see a change in the ultimate amount given the time horizon (June will come faster than we think).  Indeed, continuing high unemployment alone argues against meaningful alteration of the policy despite signs of economic health.  Second, the oil price shock raises the odds for another round of easing.  Simply put, the recent trajectory of commodity prices threatens to shift the story from a benign signal that the economy is on the mend to something much more dire.  And much more dire generally induces monetary easing, not tightening.

Consider an example I recently used in class.  The question:  What is the impact of a commodity price shock?  To gain some direction, construct a four variable vector autoregression of commodity prices, core PCE prices, real GDP, and the federal funds rate.   For a commodity price measure, I used the PPI measure for Crude Materials for Further Processing.... I estimated the model with 5 quarterly lags over the period 1984:1 to 2010:4.  I then generated impulse response functions.... [A] roughly 8 percentage point increase in commodity prices yields virtually no impact on core inflation, but, after four quarters, drives real GDP growth down .17 percentage points.  Monetary policy responds with a .23 percentage point decrease in the fed funds rates after 7 quarters.  Of course, in the current zero interest rate environment this response would need to be mimicked with a fresh expansion of the quantitative easing (I have yet to find a satisfactory replacement for the federal funds rate to take into account the zero bound.  Topic for future research)....

[W]e are experiencing a significant commodity price shock this quarter.  While certainly a drag on growth, is it yet sufficient to derail the recovery?  The White House thinks no.... “Anything like we have seen so far neither we nor the private sector has forecast that would derail our recovery,” Goolsbee said yesterday at a breakfast with reporters organized by the Christian Science Monitor. I would tend to agree – if commodity price inflation slows sharply at this point.  But the surge of recent weeks has already exceeded my expectations.... The economy can’t withstand another quick run to $140 a barrel, and I suddenly feel that we are at a tipping point to brings such a run into view...

Oil Price Shocks

Macro Advisers:

An increase in oil prices of $10/bbl for one year starting in the first quarter of 2011 would:

Reduce GDP growth by about 0.3 percentage point over the first half of the year and by 0.2 percentage point over the entire year.

Headline PCE inflation would be about 0.1 percentage point higher over the year, and the unemployment rate would also be about 0.1 percentage point higher.

We will issue a more extensive alternative scenario next week that will incorporate a significantly higher path of oil prices and related financial-market spillovers after the completion of our forecast update...stay tuned.

Pain without Purpose

We are live at Project Syndicate: http://www.project-syndicate.org/commentary/delong111/English

BERKELEY – Three times in my life (so far), I have concluded that my understanding of the world was substantially wrong. The first time was after the passage in 1994 of the North America Free Trade Agreement (NAFTA), when the flow of finance to Mexico to build factories to export to the largest consumer market in the world was overwhelmed by the flow of capital headed to the United States in search of a friendlier investment climate. The result was the Mexican peso crisis of later that year (which I, as US Assistant Secretary of the Treasury, had to help contain).

My second epiphany came in the fall and winter of 2008, when it became clear that large banks had no control over either their leverage or their derivatives books, and that the world's central banks had neither the power nor the will to maintain aggregate demand in the face of a large financial crisis.

The third moment is now. Today, we face a nominal demand shortfall of 8% relative to the pre-recession trend, no signs of gathering inflation, and unemployment rates in the North Atlantic region that are at least three percentage points higher than any credible estimate of the sustainable rate. And yet, even though politicians who fail to safeguard economic growth and high employment tend to lose the next election, leaders in Europe and the US are clamoring to enact policies that would reduce output and employment in the short run.

Am I missing something here?

I had thought that the fundamental issues in macroeconomics were settled in 1829. Back then, even Jean-Baptiste Say no longer believed in Say's Law of business-cycle frequencies. He knew very well that a financial panic and excessive demand for financial assets could produce deficient demand for currently-produced commodities and for labor, and that while such a short-run breakdown of Say's Law might be temporary, it was nonetheless highly destructive.

Armed with that insight, the disease of the business cycle should be addressed in one or more of three ways.

Don't go there in the first place. Avoid whatever it is – whether an external drain under the gold standard or a collapse of long-term wealth as with the collapse of the dot-com bubble or a panicked flight to safety as in 2007-2008 – that creates a shortage of, and excess demand for, financial assets.

If you fail to avoid the problem, then have the government step in and spend on currently produced goods and services in order to keep employment at its normal levels to offset private-sector spending cuts.

If you fail to avoid the problem, then have the government create and provide the financial assets that the private sector wants to hold in order to get the private sector to resume its spending on currently produced goods and services.

There are a great many subtleties to how a government should attempt to pursue each of these policy options. Attempts to carry out one of the three may exclude or interfere with attempts to carry out the others. And, if inflationary expectations become embedded in an economy, it may be impossible for any of the three cures to work. But that is not our situation today.

Likewise, if the perceived creditworthiness of the government is shaken, then intervention from some outside lender of last resort might be essential for either the second or third cure to work. But that, too, is not the situation today in the core economies of the North Atlantic.

Yet, somehow, all three of these cures are now off the table. There is no likelihood of reforms of Wall Street and Canary Wharf aimed at diminishing the likelihood and severity of any future financial panic, and no likelihood of government intervention to restore the normal flow of risky finance through the banking system. Nor is there any political pressure to expand or even extend the anemic government stimulus measures that have been undertaken.

Meanwhile, the European Central Bank is actively looking for ways to shrink the supply of financial assets that it provides to the private sector, and the US Federal Reserve is under pressure to do the same. In both cases, it is claimed that further expansionary asset-provision policies run the risk of igniting inflation.

Yet no likelihood of inflation can be seen when tracking price indexes or financial-market readings of forecast expectations. And no approaching government debt crisis in the core economies can be seen when tracking government interest rates.

Nevertheless, when you listen to the speeches of policymakers on both sides of the Atlantic, you hear presidents and prime ministers say things like: "Just as families and companies have had to be cautious about spending, government must tighten its belt as well."

And here we reach the limits of my mental horizons as a neoliberal, as a technocrat, and as a mainstream neoclassical economist. Right now, the global economy is suffering a grand mal seizure of slack demand and high unemployment. We know the cures. Yet we seem determined to inflict further suffering on the patient.

Friday March 4, 2011: The Value of Global History for Modern Political Economy

Topic:

There is a growing faction in the academy arguing that education for global citizenship requires that students learn some "global history." Certainly our Political Economy major here at Berkeley has placed a lot of its chips on this bet. But is this argument true? What is the value of "global history" for the student and analyst of modern political economy issues, anyway?

Panel:

Chair, J. Bradford DeLong, UCB Economics

Speaker, Tyler Stovall, UCB History and Undergraduate Interdisciplinary Studies

Speaker, Alan Karras, UCB International and Area Studies

Speaker, Mark Healey, UCB History and Latin American Studies

Location: Blum Hall Plaza Level

Time: 2:10-2:40: Panelists. 2:40-3:10: Discussion. 3:10-4:00: Reception.

Why Oh Why Can't We Have a Better Press Corps? (New York Times Needs to Fire All Sulzbergers Immediately Edition)

Outsourced to Keith Olbermann:

New York Times Punk’d By Anti-Union Plant: Few news stories better spoke to the destruction of union solidarity and the realization that even those public employees collectively bargaining in Wisconsin were going to have to give something back, than the New York Times’ piece a week ago tomorrow titled “Union Bonds In Wisconsin Begin To Fray.” The by-line was shared by no less than Arthur G. Sulzberger, the son of the publisher and official carrier of the Times’ family name. The piece ran prominently on the front page. Sulzberger himself interviewed the main ‘get’ in the piece. Beyond the mere reporting was the symbolism of the Times - even the sainted liberal media Times – throwing in the towel on the inviolability of unions, conceding that an American state could renege with impunity on a good faith contract with anybody, and that maybe the Right is right every once in awhile. Problem is, A.G. Sulzberger’s featured disillusioned unionist interviewee…wasn’t in a union.

JANESVILLE, Wis. — Rich Hahan worked at the General Motors plant here until it closed about two years ago. He moved to Detroit to take another G.M. job while his wife and children stayed here, but then the automaker cut more jobs. So Mr. Hahan, 50, found himself back in Janesville, collecting unemployment for a time, and watching as the city’s industrial base seemed to crumble away. Among the top five employers here are the county, the schools and the city. And that was enough to make Mr. Hahan, a union man from a union town, a supporter of Gov. Scott Walker’s sweeping proposal to cut the benefits and collective-bargaining rights of public workers in Wisconsin, a plan that has set off a firestorm of debate and protests at the state Capitol. He says he still believes in unions, but thinks those in the public sector lead to wasteful spending because of what he sees as lavish benefits and endless negotiations. “Something needs to be done,” he said, “and quickly.”

Compelling, damning, overwhelming words, and from such a source!

Except the source, Rick Hahn, now admits that while he worked in union factories, he was never, you know, in a union per se. So why did the Diogenes of the Times, Mr. Sulzberger, believe he had found his honest union man? Because Hahn “described himself to a reporter as a ‘union guy.’” And yes, Hahan/Hahn’s deception, intentional or accidental (and if you noticed the multiple spelling, yes, Mr. Sulzberger of the Times also got the guy’s name wrong) sat out there in the alleged newspaper of record for four days, during which nobody bothered to correct the sloppy, destructive reporting of the Family Heir. When they finally did, editors buried it inside. ‘Buried it inside’ is newspaper lingo, in case A.G. Sulzberger isn’t familiar with it.

We know about this Times disaster from last Tuesday because the paper finally got around to correcting it in Saturday’s edition. The mistake got page 1A. The correction got a little box “below the fold” (somebody explain that term to Mr. Sulzberger, too) on 2A, which is read about as thoroughly as the drug interaction warnings that come with aspirin:

A front-page article on Tuesday about reaction among private-sector workers in Wisconsin to Gov. Scott Walker’s effort to cut benefits and collective-bargaining rights for unionized public employees referred incorrectly to the work history of one person quoted, and also misspelled his surname. While the man, Rich Hahn (not Hahan) described himself to a reporter as a “union guy,” he now says that he has worked at unionized factories, but was not himself a union member. (The Times contacted Mr. Hahn again to review his background after a United Auto Workers official said the union had no record of his membership.)

This clear picture of a bunch of agendas happily coinciding – ‘Sulzberger! Find me a Wisconsin union guy who agrees with the Governor!’ – and to hell with the facts or the fact-checking or the spelling, with the truth coming to light only from – gasp! – an actual union guy (from the devil UAW itself!), has been reduced to a “PS, the publisher’s kid kinda screwed up on the most important domestic news story of the moment” instead of serving as the springboard for something fair, or even useful – maybe a front-page piece about the disinformation war being waged by Governor Walker and the Koch Brothers and the Tea Party in Wisconsin and whether or not this Hahan/Hahn was part of it, intentionally or inadvertently....

The obvious point about Sulzberger’s story is that, at best, the Times made a terrible mistake rendering fraudulent a featured piece on imperiled American freedom in the middle of an info-war over that freedom by a reporter whose name is synonymous with its power structure and then tried to whitewash itself (or, at worst, it wasn’t an amazing coincidence, and the Times got played like the proverbial three-dollar banjo and then tried to whitewash itself). Seems to me the Times could start with finding out exactly who Mr. Hahan/Hahn is. There appears to be a “Rich Hahn” involved with “staffing and recruiting” for a company called “PSI” in the “Janesville/Beloit area” in Wisconsin. Is that Mr. Sulzberger’s “union guy”? I’d try to tell you before, but that shred of possibly irrelevant information required me to expend nearly one entire calorie of brain heat performing a google search that kept me hopping for 30 seconds. I just did more research than the Times did and I need a nap. Maybe they could talk to Gabrielle Union. She must have an important point of view on organized labor. Man, what if she liked Walker’s proposals! That’d be some story, huh? That’d get the Right Wing off our backs for eight seconds? Am I right? Sulzberger? Sulzberger? Hello?...

And to Digby:

Digby:

Hullabaloo: Olbermann... may be a good blogger and a great broadcaster, [but] he missed a very important part of this story. But Jonathan at A Tiny Revolution caught it right away:

For me the best part of the Scott Walker prank call is how much he loves a New York Times article:

SCOTT WALKER: The New York Times, of all things—I don't normally tell people to read the New York Times, but the front page of the New York Times, they've got a great story—one of these unbelievable moments of true journalism—what it's supposed to be, objective journalism—they got out of the capital and went down one county south of the capital, to Janesville, to Rock County, that's where the General Motors plant once was.
FAKE DAVID KOCH: Right, right.

WALKER: They moved out two years ago. The lead on this story's about a guy who was laid off two years ago, he'd been laid off twice by GM, who points out that everybody else in his town has had to sacrifice except for all these public employees, and it's about damn time they do and he supports me. And they had a bartender, they had—every stereotypical blue collar worker-type, they interviewed, and the only ones who weren't with us were ones who were either a public employee or married to a public employee. It's an unbelievable—so I went through and called all these, uh, a handful, a dozen or so lawmakers I worry about each day, and said to them, everyone, get that story and print it out and send it to anybody giving you grief.

Noting the fact that the article was written by Sulzberger Jr he later wrote:

So that's ominously funny and funnily ominous in its own right. But we don't need to try to predict how honest New York Times coverage will be in the future when A.G. Sulzberger becomes publisher...because we can just examine his writing right now. Sulzberger just wrote a 733-word article about the prank call. Number of mentions of Walker loving a certain Sulzberger-written New York Times article? Zero.

Yes, that's right. Sulzberger Jr also wrote the article for the NY Times about Walker's prank call and never mentioned that Walker had talked at length about his own (incorrect) article in the call.

One hates to think that just because Sulzberger is the heir to a great newspaper empire that he has an agenda. And perhaps it's better to use Occam's Razor and just assume that he's lazy and inept as so many bosses sons are. But these events are ironically funny at the very least. Indeed, the fact that they assigned the Paris Hilton of newspapers to cover this story at all is hilarious, especially considering that he accepted the word of someone who said he was "a union man" and didn't bother to ask what union he belonged to. I'm guessing that Sulzberger Junior just assumed that no one would lie about being a member of a union. Or maybe he was the only person he could find to properly illustrate the article he already wanted to write.

This is a lovely little story of Big Media and its biases working in favor of the ruling class. Just as one would expect...

John Quiggin Walks the Web of the Future and Examines the House of Saud

JQ:

After the Sauds: The downfall of the Gaddafi dictatorship now seems certain, despite brutal and bloody attempts at repression. The failure of these attempts kills off what was briefly the conventional wisdom, that dictatorships in the region can hold on if they “don’t blink“. At this point, Gaddafi and his remaining supporters will be lucky if they can make it to The Hague for their trials.... Now a new conventional wisdom seems to be emerging... while dictatorships (more accurately perhaps, tyrannies, in the classical sense of monarchs who have seized their thrones with no prior hereditary claim) are doomed, but that monarchies can survive with cosmetic concessions. In particular, on this analysis, the US relationship with the House of Saud can go on more or less as before.

There’s an element of truth here, but the central claim is wishful thinking

The element of truth is that the Arab monarchies have good prospects of survival if they can manage the transition to constitutional monarchy. And it makes sense for them to do so. After all, a constitutional monarch gets to live, literally, like a king, without having to worry about boring stuff like budgets and foreign affairs. And, in the modern context, the risk that such a setup will be overthrown by a military coup, as happened to quite a few of the postcolonial constitutional monarchs, is much diminished. By contrast, there’s no such thing as a constitutional dictatorship or tyranny and no way to make the transition from President-for-Life to constitutional monarch....

[T]he general point is valid enough. But it doesn’t yield the kind of conclusion implied by the conventional wisdom. The first big difficulty is with the assumption that the monarchs can retain sufficient power to be useful allies of the kind US foreign policy has traditionally sought.... That seems unlikely to me. Monarchs who want to survive should be looking to transform themselves into ornamental figureheads/elder statesmen, not just sacking their existing governments but holding free elections to pick new ones and handing over effective power. That shouldn’t be too hard in, say, Morocco or Jordan, but it will imply that existing relationships with the kings of those countries will be about as valuable as close personal ties with Queen Beatrix.... The other big problem is that this can’t easily be done in Saudi Arabia. There are not even the forms of a constitutional government to begin with. Worse, the state is not so much a monarchy as an aristocracy/oligarchy saddled with 7000 members of the House of Saud, and many more of the hangers-on that typify such states. These people have a lot to lose, and nothing to gain, from any move in the direction of democracy.

The absence of any kind of organised opposition may allow the Sauds to hang on through the current crisis, but assuming that democratisation is successful elsewhere, the regime will stand out as an indefensible medieval anachronism.... I’d put the life expectancy of the regime in months or maybe years, but not in decades. In particular, it’s hard to imagine the monarchy outlasting the current King, Abdullah, aged 88 (according to Wikipedia, his brother and heir aged 82, enjoys the flattering title “Prince of Thieves“).

What would the Middle East be like, if Arabia were no longer ruled by the Sauds? No doubt experts have written on this, but a cursory Google didn’t find any, so it’s open for blog speculation....

Saudi Arabia has already ceased to play the central role it once held in oil markets.... If the downfall of the Sauds were chaotic, output might fall, and world prices rise. But as far as oil consumers are concerned, what you lose on the short-term roundabouts you gain on the long-term swings. Arabian oil is very easy to extract, so sooner or later, all of it will be....

The conventional ‘realist’ view is that Saudi Arabia counterbalances Iran.... I think this is silly. Anyone can see that the Iranian Basij are the same as the goons used by dictatorships elsewhere in the region. They managed to beat pro-democracy protestors last time, but it will be more difficult to pull that off again....

[W]hile Saudi Arabia has not exactly been friendly to Israel, it has been more subject to US influence than any likely successor regime will be. But again, the big effect for Israel will be the demonstration effect as more and more dictatorships and absolute monarchies fall. Why should Palestinians, alone in the region, be denied a democratic government and recognised international boundaries?

Finally, there’s the US.... [T]here are plenty of examples (Indonesia, Phillipines) suggesting that the successor regimes won’t necessarily be hostile.... Uncounted billions (counting Iraq, trillions) of dollars have been spent on the premise that the US has a vital interest in determining political outcomes in the Middle East. Yet in the current upsurge the US Administration has been reduced to the role of a bystander at a sporting event of which they don’t know the rules....

More than any other state in the region, and perhaps in the world, Saudi Arabia is a creation of US policy. A democratic Arabia, if it emerges, will be just another moderately problematic trading partner. After the Sauds, there will be no real reason for the US to have a Middle East policy, just as it no longer has, in any effective sense, a Latin America or Europe policy.

Information You Need to Know

From Google:

Backing up your mail with POP - Gmail Help:

Here's how to download a copy of every message in Gmail to an email client:

Sign in to Gmail.

Click Settings at the top of any Gmail page, and open the Forwarding and POP/IMAP tab.

Select Enable POP for all mail (even mail that's already been downloaded).

Click Save Changes.

Open the mail client you've configured for Gmail, and check for new messages.

Gmail messages are downloaded in batches, so it may take time for everything to appear in your mail client.

The Glass Bead Game Is a Really, Really Stupid Game to Play...

Jonathan Chait:

Tom Friedman's Volcano Wakeup Call: A very clever friend sends over today's Tom Friedman column edited down to nothing but mixed metaphors and cliches:

A wake-up call’s mother is unfolding.  At the other end is a bell, which is telling us we have built a house at the foot of a volcano. The volcano is spewing lava, which says move your house. The road will be long and rocky, but it will trigger a shift before it kicks. We can capture some of it. IF the Middle East was a collection of gas stations, Saudi Arabia would be a station. Iran, Kuwait , Bahrain, Egypt, Libya, Iraq, and the United Arab Emirates would all be stations. Guys, here’s the deal. Don’t hassle the Jews. You are insulated from history. History is back. Fasten your seat belts. Don’t expect a joy ride because the lid is blowing off. The west turned a blind eye, but the report was prophetic, with key evidence. Societies are frozen in time. No one should have any illusions. Root for the return to history, but not in the middle.

My friend could have published this himself, but he was between a rock and a hard place with no easy answers.

Chinese Provincial Inequality

From the Economist:

Mark Thoma: The Feds Hawkish Stance

MT:

The Fed’s Hawkish Stance - CBS MoneyWatch.com: Why such a hawkish stance among the members of the Fed?... [T]here is more to the hawkishness than worry about the Fed’s expansionary policy to combat the recession. There is also the longer run issue of how the federal budget deficit might affect monetary policy. If the deficit is not reined in, and if interest rates begin to rise as the economy recovers - as they certainly will at some point, though not any time soon - then the Fed will need to decide how to respond.... The hawkishness we are seeing presently is, in part, a signal to Congress that if they don’t get the budget under control, they cannot count on the Fed to bail them out through inflationary debt monetization. The Fed is sending a very clear message that it will raise interest rates rather than let inflation become a problem even if that means slowing the economy and increasing unemployment.

But there is a danger here. Members of Congress may use this message about the difficulties deficits pose for monetary policy to bolster their efforts to pass budget reductions in the short-run that do very little to solve the long-run budget problem. For example, the GOP’s proposal to cut $61 billion from discretionary spending through cuts in programs such as Head Start and Pell Grants will do almost nothing to solve the long-run deficit problem, which is driven primarily by rising health care costs, but it could slow the recovery substantially.

The Fed cannot allow itself to be pushed into debt monetization by Congress, so communication along these lines is appropriate. However, how this message is communicated is critical.... Those Fed members who think that tighter monetary or fiscal policy is in the short-run will be harmful need to make it clear that although it’s important to solve the long-run budget problem, short-run contraction could be harmful and it could actually work against fixing the long-run problem.... [I]mmediate cuts to programs that have little or nothing to do with the long-run budget problem will harm the recovery, give the public a false sense of security that Congress is making headway on the budget problem, and it will not avoid the need to address the long-run budget issue down the road. The members of the Fed who understand this reality must do a better job of letting the public know that the current budget proposals would dim employment prospects, do almost nothing about the long-run budget problem, and make it much more likely that the Fed will face difficult choices in the future.