J. Bradford DeLong's Blog, page 2149

Larry Meyer on the Politicization of U.S. Monetary Policy

"Politicization" is the wrong word here. I would call it simply another example of how the Republican Party is not serious about government and policy, and how we would all be better off if it simply withered up and blew away:

Macroadvisers: Meyer's Musings: The Politicization of U.S. Monetary Policy: The FOMC’s move to resume large-scale asset purchases (LSAPs) was a controversial one.... The hawks on the Committee opposed this move and have been, as usual, very vocal after the meeting, loudly proclaiming their opposition. Outside the Committee, foreign government officials (principally finance ministers) have opposed the move.... Now, there is also a domestic backlash outside the FOMC. We remain steadfast in our view that the Fed will stay the course on its LSAPs plans....

What is disturbing about recent developments is the politicization of monetary policy. Notable Republican politicians have teamed up with a handful of mostly Republican economists to criticize the Fed’s actions in a politically-charged manner.... [T]he President’s defense of the Fed’s actions... triggered an automatic and reflexive reaction among some Republicans: If the President supports Fed policy, they must oppose it. It was as if Sarah Palin’s call for the Fed to “cease and desist” was all that was needed to make other Republican politicians quickly fall in line.

Those who know me know that I hate to be embroiled in a senseless partisan debate.... [W]e have worked for Republican and Democratic Administrations alike.... We were particularly troubled by the open letter to the Chairman.... The fact that (almost) only Republicans signed this “open letter” confirms that the Fed has become a political, partisan issue. That’s not healthy... as long as the Fed’s independence is respected and reaffirmed. By the tone of their criticism and the company they kept—mostly Republicans and other right-wing ideologues—the economists who signed the letter undermined their credibility to conduct the dispassionate analysis we are all trained to do.

We did take some comfort, however, in the fact that many of the most respected Republican-leaning economists did not sign this letter....

For our part, we will continue to study monetary policy issues in a dispassionate way, hopefully contributing to the serious work that needs to be done: Will LSAPs work What’s their effect on longer-dated yields? Is the monetary transmission mechanism still working? What is the best model of inflation dynamics?... What are alternative instruments available to the FOMC that might be more effective than LSAPs, and what is the role of fiscal policy? The answers to the above questions do not call for either a Democrat or a Republican response. What we need is serious empirical and modeling work that stands up to responsible peer review and scrutiny.

Foreign Policy: The Four Horsemen of the Teapocalypse

The Four Horsemen of the Teapocalypse - By Brad DeLong | Foreign Policy: John Maynard Keynes once famously observed, "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." During the crisis years of 2007, 2008, and 2009, it was the great British economist himself, along with three other dead men, who dictated the world's response from beyond the grave: Hyman Minsky, Walter Bagehot, and Milton Friedman.

Minsky, an economist at Washington University in St. Louis, for warning that times of financial calm and economic growth led banks to step further and further out onto the ice of leverage -- until finally they would step too far and fall through. Bagehot, the 19th-century Economist editor, for advising that when the bankers fell into the ice-cold lake it was essential that the government spare no expense to make sure that the network of banking survived, but needed to do so in a way that took the bankers' fortunes away. Friedman, the consummate monetarist, for seconding Bagehot's call for bank rescues in depressions -- and calling for central banks to keep the money flowing. And Keynes, for his gloomy fears that central banks would not prove powerful enough to do the job -- coupled with his overoptimistic hope that clever technocrats could then boost government spending to take up the slack.

But we are now into the "recovery," and 2010 has been a very different year. Its horsemen are of a different breed entirely. Where Keynes and his ilk were optimistic believers in the power of technocratic governments to do good, this year's horsemen are practitioners of more dismal sciences: believers that the market metes out judgments that we must suffer -- and that it is our own flawed nature that makes us believe so. In short, it has been a year for Austrian economists Friedrich von Hayek and Joseph Schumpeter, for plutocrat and Great Depression-era Treasury Secretary Andrew Mellon -- and, above all, for Friedrich Nietzsche.

There was silence in the seminar room. Richard Kahn broke it. "Do you mean to say," he asked, "that if I were to go out tomorrow and buy a new overcoat, that it would increase unemployment?"

"Yes," said the man in the front of the room, Friedrich von Hayek, "but it would take a long and complicated mathematical argument to explain why."

That is how historian Robert Skidelsky describes Hayek's visit to the proto-Keynesian economists of Cambridge University. It was the 1930s, and Hayek had met them in London to convince them that depressions were not to be avoided or cured, but rather endured. In his thinking, they were righteous karmic payback for past sins against the gods of monetary orthodoxy. Any attempts to cut them short or make them shallower would produce only temporary palliation, at the cost of a fiercer, deeper, and nastier further depression in the future.

Hayek's fellow countryman, Joseph Schumpeter, went further: "Gentlemen!" he announced to his students at Harvard University (there were no ladies). "A depression is healthy! Like a good ice-cold douche!" If depressions did not exist, Schumpeter thought, we would have to invent them. They were "the respiration of the economic mechanism."

Agreeing with Schumpeter was Herbert Hoover's Treasury secretary, Andrew Mellon. In his memoirs Hoover was bitter toward many, but bitterest of all toward Mellon, whom he called the head of the "leave it alone liquidationists." Hoover quotes Mellon: "It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people." Hoover opposed Mellon's policies, he said, and worked to undermine them. But what could he do? He was, after all, only the president. And Mellon was Treasury secretary.

Think Mellon is just an anachronism? Then consider current British chancellor of the Exchequer, George Osborne, and his claim that today's record-low interest rates in Britain are a sign of financial strength and not of anticipated prolonged depression: "The emergency budget in June was the moment when fiscal credibility was restored. Our market interest rates fell to near-record lows." That is pure Mellon. It is definitely not Keynes. It is definitely not even Milton Friedman.

Friedman himself condemned Hayek, Schumpeter, and Mellon as devotees of an "atrophied and rigid caricature" of his own doctrines. "[T]his dismal picture," said Friedman, led "young, vigorous, and generous mind[s]" to recoil. And both Keynes's and Friedman's flavors of postwar American macroeconomics, with its focus on government action to maintain stable growth, were the happy result.

Nothing has changed in the past few years to make Hayek's, Schumpeter's, and Mellon's arguments stronger intellectually against the critiques of Keynes and Friedman than they were 60 years ago. On substance, their current victory is inexplicable. But their triumph, epitomized by the Tea Party movement and its hostility to government action, can be explained by our fourth horseman: Friedrich Nietzsche in his role as psychologist of human ressentiment.

Nietzsche talked about the losers -- or rather, about those who thought they were the losers. He looked at those who saw themselves as weak and poor -- rather than strong and rich -- and saw trouble. "[N]othing on earth consumes a man more quickly than the passion of resentment," he wrote. It drives us to madness.

Think of that when you consider this: The U.S. unemployment rate is stubbornly high, yet aid from a federal government that can borrow at unbelievably good terms could allow states to maintain their levels of public employment, and those public workers would then spend their incomes and so boost the number of private-sector jobs as well. But the voters are against that. No, they say. We have lost our jobs. It is only fair that those who work for the government lose their jobs as well -- never mind that each public-sector job lost triggers the destruction of yet another private-sector job. It's the underlying logic that has led to a wave of austerity across Europe that is now headed for America's shores. And it's the same logic that says, "It is only fair that homeowners lose their money" -- never mind that everyone's home prices will suffer. What does not kill me makes me stronger.

Because some are unemployed, unemployment is good -- we need more of it. Because some have lost their wealth, wealth destruction is good -- we need more of it. That is a psychology that Friedrich Nietzsche would have understood all too well. For, as he put it, "If you gaze long into an abyss, the abyss will also gaze into you."

Yet Another Reason Friends Don't Let Friends Vote Republican

Douglas Holtz-Eakin, Kevin Hassett, and others on November 15, 2010:

An Open Letter to Ben Bernanke: We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.

We subscribe to your statement in The Washington Post on November 4 that "the Federal Reserve cannot solve all the economy's problems on its own." In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed's purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

Douglas Holtz-Eakin, on November 24, 2010, trying to claim that the letter was not the partisan political attack that it was:

Quantitative Easing II: The letter... does not say... anything...that might be genuinely politicizing the Fed.... [T]he issue became “political” the moment that the QE II defenders asserted that it was a political attack. It is disappointing that when presented with a serious critique by academics, think tank analysts, and market participants the immediate response is “it must be a conservative attack on the Fed.” Note that implicitly this also carries the message: “I’d never consider that conservatives have ideas or that I might learn something from them.”  So sad...

Kevin Hassett, on November 23, 2010, undermining Doug's claim that the letter was not what it was before Doug said it:

Guest Commentary: I’ve signed many open letters to policy makers over the years. The response to this one was stunning. I was surprised, and remain so, that the letter was criticized so widely and so passionately.... I’ll be the first to admit that the letter may have forfeited some impact because of the obvious Republican bent of the signers, some of whom, shall we say, don’t exactly spend their typical workday immersed in equations...

Doug says--despite its raving about "currency debasement... inflation... broad opposition from other central banks"--the letter is not a partisan attack but rather "a serious critique by academics, think tank analysts, and market participants." Kevin says that the signers were not people qualified to make a serious technocratic critique but rather Republican worthies--and that that made it impossible to read it as a serious technocratic critique.

I am with Kevin. I read this as Brent Scowcroft and Jack Danforth read Republican opposition to START. Scowcroft:

It is not clear to me what [the source of opposition] is. I have got to think that it is the increasingly partisan nature [of the Republican Party] and the desire [by the Republican Party] for the president not to have a foreign policy victory...

Danforth:

If Dick Lugar, having served five terms in the U.S. Senate and being the most respected person in the Senate and the leading authority on foreign policy, is seriously challenged by anybody in the Republican Party, we have gone so far overboard that we are beyond redemption. I am glad Lugar’s there and I am not...

If Douglas Holtz-Eakin wants to make a serious critique of Federal Reserve policy, he should make it in different company--and he should actually make it rather than raving about "currency debasement... inflation... broad opposition from other central banks."

Department of "Huh?!"

Robert Barro says two things:

Free exchange | The Economist: My conclusion is that QE2 may be a short-term expansionary force, thereby lessening concerns about deflation. However, the Treasury can produce identical effects by changing the maturity structure of its outstanding debts.

And:

The downside of QE2 is that it intensifies the problems of an exit strategy aimed at avoiding the inflationary consequences of the Fed’s vast monetary expansion.

Would we say that a change by the Treasury in the maturity of its outstanding debt intensifies the problems of devising an exit strategy for unwinding the Federal Reserve's vast monetary expansion when it is appropriate?

I do not think we would. The problems of the Federal Reserve exit strategy are there, and they remain unchanged no matter what the Treasury does with the maturity structure of its debt.

So how is it that QE can (a) be identical to a Treasury shift in maturity structure, and yet (b) intensify problems of unwinding monetary expansion?

The Washington Post Embarrases Itself Once Again

Will somebody please go hose it off?

Calculated Risk watches the train wreck:

Calculated Risk: Monetary Policy Confusion: An editorial in the WaPo yesterday - and some recent emails I've received - indicate there is some confusion on the difference between monetary and fiscal policy. From the WaPo yesterday:

Kicking the Fed: [B]uying hundreds of billions of dollars worth of federal debt in a deliberate effort to lower long-term interest rates and boost employment looks to many economists, market participants and politicians like fiscal policy by another name.

Calculated Risk says:

Well, these "economists, market participants and politicians" are confused.

Me? I don't believe these economists, market participants, and politicians exist. Expansionary monetary policy is when the Federal Reserve buys government debt for cash. Expansionary fiscal policy is when the U.S. Treasury sells government bonds for cash and uses the cash to fund its operations. See the difference between "buy" and "sell"? Buying something is not "like" selling it: it is the opposite of selling it.

Why oh why can't we have a better press corps?

Slacktivist Is Dismayed

Slacktivist:

slacktivist: 'Dismaying': One fourth of respondents said they "do not believe in evolution," while another 36 percent said they had no opinion and only 39 percent said they "believe in evolution." So that's about 60 percent of the country that doesn't "believe in" evolution. It's hard to know what that means, exactly, to "believe in" or "not believe in" evolution. It's like not believing in Missouri, or not believing in thermal conduction...

Fall 2010: Econ 1: Request for Questions for Final Exam

Anybody have any questions they want me to ask on the final exam--either the sample final exam or the real final exam?

Econ 1: Fall 2010: Draft Problem Set #8

DRAFT Problem Set #8 : Due at the beginning of lecture Monday, December 6, 2010

(A) Economic Theory of Politics: Suppose that there are two political parties--the Caps and the Hats. Suppose voters’ preferences as to the size of federal government spending are uniformly distributed between a lower value of 10% of GDP and a higher value of 40% of GDP. Suppose also that each political party announces a single number as its platform for the federal government share of GDP, and that voters vote for the party whose platform is closest to their preference.

Suppose that the Caps announce a platform of 15% of GDP and the Hats announce a platform of 30% of GDP. What share of the vote do the Caps get?

Suppose that the Caps announce a platform of 25% of GDP and the Hats announce a platform of 30% of GDP. What share of the vote do the Caps get?

Suppose that the Caps announce a platform of 24.99% of GDP and the Hats announce a platform of 25.01% of GDP. What share of the vote do the Caps get?

Economists Anthony Downs and James Buchanan and political scientist Gordon Tullock have argued that a two-party system where politicians are most interested not in maintaining ideological purity but in getting elected and reelected does a good job in producing a government that governs according to the will of the people. What bearing do you think this problem has on this issue? Does it strengthen or weaken your assessment of the Downs, Buchanan, Tullock position?

(B) Economic Theory of Politics: Suppose that two-thirds of the voters have preferences as to the size of federal government spending that are uniformly distributed between a lower value of 10% of GDP and a higher value of 40% of GDP, and that one-third of the voters have no preference at all but vote for the party whose candidates’ advertisements have the highest production values. The rich who can afford to make campaign contributions all prefer a government of 10% of GDP. Suppose that there are two political parties: the Caps and the Hats. Each political party announces a single number as its platform for the federal government share of GDP, and that voters vote for the party whose platform is closest to their preference.

Suppose that the Caps announce a platform of 25% of GDP and the Hats announce a platform of 25.01% of GDP. What share of the vote do the Caps get?

Suppose that the Caps announce a platform of 25% of GDP and the Hats announce a platform of 20% of GDP. What share of the vote do the Caps get?

Suppose that the Caps have to announce first, and the Hats—who have no principles at all—then get to choose the platform that maximizes their vote share. If the Caps choose 25%, what do the Hats choose?

Suppose that the Caps have to announce first, and the Hats—who have no principles at all—then get to choose the platform that maximizes their vote share. If the Caps choose 15%, what do the Hats choose?

Suppose that the Caps have to announce first, and the Hats—who have no principles at all—then get to choose the platform that maximizes their vote share. What should the Caps choose in order to maximize their vote share assuming that the Hats will then make the best move in response?

Suppose that the Good Government Coalition puts a referendum on the ballot—a referendum abolishing private campaign contributions and establishing a public system of funding elections that gives each party equal amounts of money to make high production value advertisements. Do you vote for or against this referendum? Why?

(C) Social Choice: Alice thinks the government should build a bridge. If it can’t build a bridge, she thinks it should build a dam. Bobby thinks the government should build a dam. If it can’t build a dam, he thinks it should establish a nature preserve. Carla thinks the government should establish a nature preserve. If it can’t establish a nature preserve, she thinks it should build a bridge. You are brought in as a mediator to suggest a system for social choice that they could establish to decide what the government should do. What do you suggest?

(D) Adverse Selection: Suppose that half of all potential used-car sellers are people who have to sell because they are moving to Fairbanks, Alaska tomorrow and the other half are people who will sell only if they are offered a good deal. Suppose that, for each group, the value of the used car is uniformly distributed between 0 and $10000.

Suppose that you offer $2000 to a seller. What is the chance that you buy the car? What is the expected value minus cost to you if you do buy a car?

Suppose that you offer $4000 to a seller. What is the chance that you buy the car? What is the expected value minus cost to you if you do buy a car?

Suppose that you offer $6000 to a seller. What is the chance that you buy the car? What is the expected value minus cost to you if you do buy a car?

Suppose that you offer $8000 to a seller. What is the chance that you buy the car? What is the expected value minus cost to you if you do buy a car?

Suppose that you offer $10000 to a seller. What is the chance that you buy the car? What is the expected value minus cost to you if you do buy a car?

What would you offer, and why?

(E) Uncertainty: Suppose that your happiness bears a logarithmic relationship to your total lifetime income—that you gain as much happiness moving from a lifetime income of $2.5 million to $5 million than you gain from moving from a lifetime income of $5 million to $10 million. If so, which would you rather have: a certain lifetime income of $5 million, or...

A 50% chance of $2.5 million and a 50% chance of $10 million.

A 50% chance of $2 million and a 50% chance of $20 million.

A 75% chance of $2 million and a 25% chance of $50 million.

A 90% chance of $4 million and a 10% chance of $50 million.

An 80% chance of $2 million and a 20% chance of $150 million.

A 90% chance of $2 million and a 10% chance of $1 billion.

An 80% chance of $2 million and a 20% chance of $1 billion.

Do the answers to these calculations feel right or wrong to you? Why?

(F) Information Goods: Consider an information good—that is, something with a marginal cost of zero, like a piece of software. It does, however, cost an amount C to invent and start to distribute the good. Demand for the good in terms of consumers’ willingness-to-pay is given by Q = Qmax(1 – P/20), where P is the price that people are charged in dollars. The government does not know Qmax: all it knows is that it is uniformly distributed between 0 and 1000. The government does not know C: all it knows is that it is uniformly distributed between 0 and $20000 independent of the value of Qmax. There is, however, a Megalomania Corporation that knows C and Qmax, and that offers to undertake production of the information good if it is either (a) given legal rights to stamp out software piracy and charge a price P that it chooses to all users, or (b) given a large enough payment from the government after which it will open-source and freely-distribute its software.

Suppose the government offers to pay $2000 to Megalomania Corporation. What is the consumer surplus minus the taxpayer cost if Megalomania Corporation undertakes the project? What is the chance that Megalomania Corporation will undertake the project? What is the expected social surplus?

Suppose the government offers to pay $4000 to Megalomania Corporation. What is the consumer surplus minus the taxpayer cost if Megalomania Corporation undertakes the project? What is the chance that Megalomania Corporation will undertake the project? What is the expected social surplus?

Suppose the government offers to pay $6000 to Megalomania Corporation. What is the consumer surplus minus the taxpayer cost if Megalomania Corporation undertakes the project? What is the chance that Megalomania Corporation will undertake the project? What is the expected social surplus?

Suppose the government offers to pay $8000 to Megalomania Corporation. What is the consumer surplus minus the taxpayer cost if Megalomania Corporation undertakes the project? What is the chance that Megalomania Corporation will undertake the project? What is the expected social surplus?

Suppose the government offers to pay $10000 to Megalomania Corporation. What is the consumer surplus minus the taxpayer cost if Megalomania Corporation undertakes the project? What is the chance that Megalomania Corporation will undertake the project? What is the expected social surplus?

Suppose the government grants Megalomania Corporation enforceable property rights backed by Black Ice Hunter-Killer software bots so that everybody using its software must pay its price P to Megalomania Corporation. What price does Megalomania Corporation chooses to charge if it undertakes the project? What is the chance that Megalomania Corporation will undertake the project? What is the expected consumer surplus plus net monopoly profits?

What would you recommend that the government do?

Why We Would Be Better Off without the Republican Party

Ben Armbruster reports on Brent Scowcroft:

Scowcroft on START: ‘Partisan’ GOP Don’t Want To Give Obama ‘A Foreign Policy Victory’: Sen. Richard Lugar (R-IN) has been the leading Senate Republican urging the upper chamber of Congress to ratify the New START arms control treaty with Russia.... Lugar has been reluctant to criticize his colleagues’ obstruction. When asked last week if they were just playing politics, Lugar said, “I am not ascribing motivations to anybody.” But other Republicans don’t seem to be holding back. Brent Scowcroft served as national security adviser to two Republican presidents and has been pleading with Congress to ratify New START. Profiling Lugar’s awkward position vis-a-vis other Senate Republicans on this issue, [Abby Phillip and Carol E. Lee of] Politico report today that Scrowcroft isn’t being as diplomatic as Lugar on the GOP’s incentive for holding up START:

In an attempt to rally bipartisan support for the treaty, the White House has enlisted the kind of GOP foreign policy wise men that Lugar exemplifies – among them former secretaries of state Henry Kissinger and James A. Baker. But they have had no success with members of their own party, and it has left them scratching their heads over the source of the GOP opposition. “It’s not clear to me what it is,” said Brent Scowcroft, a former national security adviser to President George H.W. Bush who noted that this START treaty is not very different from previous ones negotiated and ratified under Republican presidents. “I’ve got to think that it’s the increasingly partisan nature and the desire for the president not to have a foreign policy victory”...

Grandmothers Raising Grandchildren Annual Fundraiser

http://grgahero.org is 55 Luo grandmothers and great-grandmothers raising 150 AIDS-orphaned grandchildren and great-grandchildren in Ahero, Kenya. They sell their baskets to buy animals, schoolbooks, and extra food through this one-woman zero-overhead NGO who is our neighbor Bee Sjostrum, who spent two years in Ahero as the oldest Peace Corps volunteer in East Africa.

Posted via web from delong's posterous

From 24 hours, from noon EST November 27 to noon EST November 28 only, Ann Marie and I are matching basket purposes through the GRG website. Our basket is now three years old, and has worn like iron: they do good work in Ahero.

If you want a hand woven basket, or simply to spend $30 that would otherwise go to your surplus on their substance, please buy.

And Ann Marie and I extend a special invitation to those who want to do the right thing for the wrong reason--who want to boast about how generous they are, or feel the warm glow of knowing that they are good people, or fend off feelings that they are bad and greedy people, or who think they need to buy advocates before the Judgment Throne: your deeds are as precious as anyone's.