More Frank Talk From DeLong on NGDP Targeting
You know, I’ve had my differences with Brad DeLong–and I really can’t stand his habit of editing people’s comments–but he’s actually a straight shooter. Robert Waldmann had asked the entirely reasonable question, “Jan Hatsius (and Brad DeLong) argue that the Fed should declare its intention of buying whatever quantity it takes of long-term Treasuries to achieve a nominal GDP target. But what if there is no such quantity?”
DeLong’s response is breathtaking (as is just about everything coming from the big-guns pushing nominal GDP targeting):
The government can buy more than Treasuries. After Treasuries, you buy GSE debt. And if that doesn’t work, you buy bank and corporate debt. And if that doesn’t work, you lend JPMorganChase $30 billion on the security of Jamie Dimon’s dog. And if that doesn’t work, you buy equities. And if that doesn’t work, you buy the services of construction workers–by which time you are explicitly doing money printing-financed fiscal policy.
Whoa! Do y’all like the part about giving $30 billion to JP Morgan? Sorta puts Goldman Sachs’ recent endorsement of the approach in a new light.
But now for DeLong’s refreshing candor. He admits:
The thing that scares me is that I am not at all sure what or how much the Fed would have to buy. If you had asked me back at the start of 2008 how much the Fed would have to buy in order to keep nominal GDP on its pre-2008 growth trend, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet from $1 trillion to $1.5 trillion. And if you had asked me in the middle of 2008, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet to $2 trillion. And if you has asked me at the end of 209, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet to $3 trillion. Yet here we are with a Fed with a $3 trillion balance sheet…
This is what has frustrated me so much, about the people who are saying, “Oh man, the Fed did it again. They didn’t inflate enough back in the early 1930s, and they’re doing the same mistake this time around.”
Like DeLong is admitting here, I think if you asked 100 economists in 2007 what “shock and awe” would look like, in order for the Fed to show it wasn’t going to let the economy collapse like it (ostensibly) did in the early 1930s, then 99 of them would say a mere doubling of the Fed’s balance sheet would have been overkill. And yet, the Fed has done more than that.
I understand that the market monetarists (that’s the name they’ve settled on) are arguing that done properly, NGDP targeting back in 2008 wouldn’t have required such a big expansion of the monetary base. Yet if that’s true, why do the market monetarists persist in calling the Fed’s actions thus far “contractionary” and “too tight”? They should say something like “misguided” or “inefficient,” but not “contractionary” and “tight.”
If there’s a small kitchen fire in a house, and the fire department sends 50 pumper trucks that completely flood the next door neighbor’s house, I wouldn’t call for more liquidity. I wouldn’t say that the fire department had instituted a needlessly arid policy. Instead, I’d say they were pumping way the heck too much water, and instead they should have chosen a different target.
(Note that in this analogy, DeLong would say, “Keep pumping water at any structure in the neighborhood. Eventually you’re bound to put out that kitchen fire, even if it’s because you flood the whole town with 8 feet of water.”)
Krugman Is the Herman Cain of Bailouts and the Euro
No, I don’t mean Krugman favors a $999 billion bailout (that’s much too small), I mean that he simultaneously tries to take both sides of a hot-button issue. (Poor John Stossel!)
In a snarky post entitled, “A Tale of Two Krugmans,” I alluded to the fact that Krugman thought he blew up the case for laissez-faire on bailouts by declaring the position politically impossible:
One line I’ve been seeing in various places, including comments here, is the claim that the real way to deal with Wall Street is laissez-faire economics: no more bailouts! On this view, policy makers should raise their right hand in the air, place their left hand on a copy of Atlas Shrugged, and swear in the name of A is A that they will never again step in to rescue failing banks. And all will be well with the world.
Sorry, but that’s a fantasy.
…[E]ven if you persuade yourself that the moral hazard created by financial firefighting outweighs the benefits of avoiding a 1931-style cascading crisis, the fact is that policy makers will intervene. Hank Paulson set out to make Lehman an example; two days later he was staring into the abyss.
So the only feasible strategy is guarantees and a financial safety net plus regulation to limit the abuse of those guarantees.
I then linked to Krugman’s discussion of Iceland, in which he praised its government for not bailing out it bankers, the way orthodox opinion had said was necessary (and of course, Krugman had been on the side of the good guys on the issue).
Yet that particular quotation was murky, because Krugman mixed it up with some discussion of debt restructuring, and because it was from November 2010.
But now, a mere two weeks after Krugman told us that it was a fantasy to expect politicians not to bail out their big bankers, Krugman cleanly declares the following:
You can play with different numbers and try to make Iceland look worse in comparison, but the bottom line here is that Iceland — while it has suffered terribly — really does not seem to have done as badly as other countries that seemed to have much less awful fundamentals.
Part of the story, of course, is that Iceland refused to take responsibility for the debts run up by runaway bankers.
So I guess the politicians in Iceland are big Atlas Shrugged fans? Maybe they listen to David Hasselhoff and read Ayn Rand?
Now here’s another really weird thing about Krugman: A mere two posts before the one explaining Iceland’s great decision not to bail out its bankers, Krugman said that the European governments urgently need to bail out their bankers!
The usually very insightful Kantoos seems to have missed what people like me are actually saying about the need for emergency funding in Europe.
[Krugman then quotes Kantoos on an alleged Krugman argument.–RPM]
That’s not the actual argument; I know very well that liquidity problems generally reflect solvency concerns. The point, however, is that Italy and Spain arguably are at risk of suffering from self-fulfilling panics. And you need open-ended credit to avert that fate.
Now, Kantoos is right that more expansionary ECB policy, including a higher inflation target, is really what the doctor ordered. But it would take time to get that moving; even if Mario Draghi suddenly rips off his mask and reveals himself as a closet Woodford/Svensson/Krugmanite, it would take a long time to turn monetary policy around sufficiently to restore confidence. And the existential threat to the euro zone won’t wait.
So the indicated policy is lend now, inflate later. If you don’t like that, say goodbye to the euro.
The part I’ve put in bold is why I’m claiming Krugman is now being Herman Cainesque on whether the European governments should bail out their bankers. This is analogous to Krugman’s infamous 2002 assertion that
[t]o fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
Of course, when that quote was later used to embarrass Krugman, his response was that he never meant Greenspan should try to create a housing bubble, but rather that Krugman was engaging in neutral analysis of cause-and-effect.
Krugman is playing the same game here. He has said repeatedly that the euro project was a mistake, and keeps explaining why it is crippling the constituent members’ ability to recover. (For example, the main point in the recent Iceland post linked above, is that Iceland could devalue its currency since it didn’t foolishly join the euro. Krugman says that explicitly.)
Like Cain, it’s not even that Krugman takes both sides of the issue at different times–on his blog today he takes both sides in the very same post!
The torments of the euro would be funny if they weren’t so tragic. At this point the urgent need is for a big Panzerfaust — a bailout fund big enough to head off a self-fulfilling liquidity crisis for Italy. But such a fund would be backed by the credit of the euro area’s remaining AAA governments, basically Germany and France — yet at this point the euro situation has deteriorated sufficiently that taking on another commitment would undermine French credit. There’s a hole in the bucket, and every attempt to fix that hole ends up being stymied because, well, there’s a hole in the bucket.
The answer to the whole conundrum is to back the rescue, not with French guarantees, but with the power of the printing press — to put the ECB behind the effort. But the ECB won’t and maybe can’t (under current rules) do that.
And meanwhile, austerity programs are leading to severe slumps in Greece and elsewhere. Who could have imagined that?
What a tragedy. A rich, productive continent, which has produced arguably the most decent societies in human history, is tearing itself apart because its elite insisted on embarking on a dubious monetary project, and now can’t bring itself to take the steps necessary to give that project a chance of working.
You see how he brilliantly covered all his bases there? No matter what happens, Krugman can say he called it. If there’s a big bailout of the banks (which has already happened and which will probably continue) and the region doesn’t blow up, Krugman can say he called it. If the bailouts aren’t big enough and the euro collapses, Krugman can say he called it. And if Europe is miserable for the next two years at least–which it surely will be–Krugman can say he called it, because they didn’t listen to his advice and insisted on embarking on a dubious monetary project.
Say what you will about Nouriel Roubini, at least he’s taking his own position seriously and saying they should cut Greece loose and let it devalue.
In contrast, as far as I can tell, Krugman is saying that Iceland was very wise to not join the euro and bail out its bankers, and thus his recommendation is for the European governments to bail out their bankers in order to save the euro and keep themselves tied into an awful monetary arrangement that prevents global recovery.
Two years from now, after trillions of dollars (worth) has been pumped into European banks and the system still collapses, mobs of Germans and French will dig up that smoking-gun quotation above where Krugman says, “At this point the urgent need is for a big Panzerfaust — a bailout fund big enough to head off a self-fulfilling liquidity crisis for Italy.” Krugman will shrug and tell them, “Yeah, what the heck did you guys do that for? Didn’t you read all of my posts on Iceland?”
Clash of the Titans
I was bracing myself for a rebuttal from Bob Wenzel when I had some harsh words for his take on the consumption tax not affecting consumers at all (save in their role as producers), but not a peep. Then I realized it was because he was engaged in a multi-front war.
Wenzel was on the Peter Schiff show. As you may imagine, when two loci of such self-confidence are drawn close to each other, they repel with great force, much as two North ends of giant electromagnets.
Here’s Wenzel’s take on what happened:
Although it sounds like I stopped talking, Peter interrupted me three times during the first part of the interview. He just talked over me. The first time it happened I thought it was rude, but, hey, I have had worse things happen. I waited for him to finish and then continued with a point. He interrupted me again, this time I thought I was not letting him get away with it. I said, “Peter…Peter…Peter…Peter.” Trying to indicate that I did not give up the floor when he interrupted me. I was amazed that Peter didn’t respond, since I thought it would show how rude Peter was being. Especially, when I called out Peter’s name four times and gave him opportunity to stop between each time I called out his name. Now, I realize why he was unconcerned.
The third time he interrupted me, I simply continued talking. This went on for a full 15 to 20 seconds. I remember thinking to myself, “I can’t believe Peter is letting this crosstalk go on.” Again, now I understand why he was unconcerned.
Ah, but Mr. Schiff was like Scott Farkus who pushed little Ralphie too far by smacking him in the face with the snowball. Something snapped inside Wenzel, who then wrote on his blog:
Finally, one additional note. As I said on the show, since I am not running for office, I really don’t do much thinking about a middle game of what I would do about taxes, if I were President. Since Peter raised the question, I have thought more about it.
Peter’s father is in prison for tax evasion. One of the first things I would do as President is pardon Peter’s father and others in the same situation and then I would bring down taxes so low that tax evasion would not make sense for anyone to attempt, for either pecuniary reasons or on principle. I think it’s a better plan than Herman Cain’s.
Whoa! I think I’m going to drop this issue of debating tax structures. These guys aren’t to be trifled with. I’d be better off trying to edge in on the Russian mob’s crap games.
Jon Stewart Prescient on Libya
I didn’t see this when it originally ran. Some great lines, especially the Biden ripping in the beginning:
The Plot Thickens: I May Agree 100% With Rothbard After All
Thanks to Marris, I think this is the passage from MES that made me think I had a disagreement with Rothbard on an income tax’s impact on saving (pp. 917-919 of the Scholar’s Edition):
Some economists maintain that income taxation reduces savings and investment in society in yet a third way. They assert that income taxation, by its very nature, imposes a “double” tax on savings-investment as against consumption. The reasoning
runs as follows… [Omitted for brevity.–RPM.]…Hence, the imposition of an income tax is a “double” tax on consumption, and excessively penalizes saving and investment.This line of reasoning correctly explains the investment-consumption process. It suffers, however, from a grave defect: it is irrelevant to problems of taxation. It is true that saving is a fructifying agent. But the point is that everyone knows this; that is precisely why people save. Yet, even though they know that saving is a fructifying agent, they do not save all their income. Why? Because of their time preferences for present consumption. Every individual, given his current income and value scales, allocates that income in the most desirable proportions between consumption, investment, and additions to his cash balance. Any other allocation would satisfy his desires less well and lower his position on his value scale. The fructifying power of saving is already taken into account when he makes his allocation. There is therefore no reason to say that an income tax doubly penalizes saving-investment; it penalizes the individual’s entire standard of living, encompassing present consumption, future consumption, and his cash balance. It does not per se penalize saving any more than the other avenues of income allocation.
This Fisher argument reflects a curious tendency among economists devoted to the free market to be far more concerned about governmental measures penalizing saving and investment than they are about measures hobbling consumption. Surely an economist favoring the free market must grant that the market’s voluntary consumption/investment allocations are optimal and that any government interference in this proportion, from either direction, is distortive of that market and of production to meet the wants of the consumers. There is nothing, after all, particularly sacred about savings; they are simply the road to future consumption. But they are, then, clearly no more important than present consumption, the allocations between the two being determined by the time preferences of all individuals. The economist who balks more at interference with free-mar- ket savings than he does at infringement on free-market consumption is therefore implicitly advocating statist interference in the opposite direction. He is implicitly calling for a coerced distortion of resources to lower consumption and increase investment.
I’m not certain that the above passage is what made me file away the belief that “Rothbard doesn’t think an income tax distorts the saving/consumption decision in a bad way,” but it is definitely along the lines of what I vaguely remembered.
However, the thing that’s funny is that in the two pages before the above excerpt, Rothbard spells out the standard logic for why an income tax alters the tradeoff:
The income tax, by taxing income from investments, cripples saving and investment, since it lowers the return from investing below what free-market time preferences would dictate. The lower net interest return leads people to bring their savings-investment into line with the new realities; in short, the marginal savings and investments at the higher return will now be valued below consumption and will no longer be made.
So at this point I’m thoroughly confused. When mainstream economists complain about “double taxation” and say that it discourages saving/investment, they are relying on the same analysis that Rothbard just gave (in the second quotation).
Since I am going to re-read the whole chapter on interventionism for my online class, I’ll come back to this issue after I have seen Rothbard’s entire tax analysis and have digested it in one full sweep. Maybe I’ll understand the context of the above excerpts better and be able to say with confidence what Rothbard meant.
At this point, my guess is the following:
==> Rothbard agreed with the standard mainstream view–a view that is often used by mainstream economists in support of a consumption or sales tax–that an income tax penalizes future consumption more than present consumption, i.e. biases people into saving a lower fraction of their income than they would choose on the free market.
==> However, Rothbard objects to the standard rhetoric that accompanies this (correct) analysis, because this rhetoric often invokes the odd phrase “double taxation” and makes it sound as if lower saving per se is a bad thing, when really the problem is with saving below the free-market level.
Last point: You might think that since I wrote the study guide to Man, Economy, and State, I would know this stuff like the back of my hand. If so, you are wrong. How embarrassed you must be, right about now.
Rothbard Bask
Well I guess I shouldn’t be surprised. Blogging something that could even be construed as a critique of Bob Wenzel’s take on something having to do with Austrian economics–even though you twice deny that that is what you are doing–is as reckless as peeing on an electric fence.
To refresh your memory, yesterday I wrote a post saying this:
Some people are asking me about Robert Wenzel’s take on Peter Schiff/Herman Cain on tax theory. I would have to sit and think through Rothbard’s argument about a consumption tax getting shifted back onto the incomes of land, labor, and capital (goods).
In the meantime, though, let me say…
To repeat, I am not here saying that Wenzel is wrong and Schiff/Cain are right. I’m just firing off a quick point that might move the ball forward for some of you.
What I was getting at in my post–and yes here I did explicitly disagree with Rothbard on one particular point–is that Rothbard somewhere challenged the standard supply-side critique of an income tax, on the grounds that it “discourages savings.” This is a standard supply-side argument, in favor of a consumption tax as opposed to an income tax.
So Rothbard had criticized this standard argument, on the grounds that the government shouldn’t be encouraging people to save more or less; people’s time preferences should determine that. Furthermore, a tax on consumption will discourage savings too, because after all you save today, in order to be able to consume in the future. So that consumption tax that will hit you in the future, will discourage your savings today.
That is the argument from Rothbard I was criticizing. In response, Wenzel didn’t get that distinction, and instead thinks I was attacking the claim about consumption taxes being shifted onto productive factors (the claim I specifically said I would have to think about).
So now for the Rothbard bask: Can someone go find me Rothbard saying that an income tax doesn’t discourage savings any more than a consumption tax? I think it’s probably in Man, Economy, and State, but it’s possible I read it in a shorter essay Rothbard wrote somewhere.
Either way, here’s an interesting take-away from Wenzel’s interpretation:
Rothbard’s view is not that the consumption tax makes consumers poorer, but that the tax is shifted backward to land and labor. Thus, there is nothing in Rothbard’s view about a consumer deciding ” in which time period to distribute the blow.” There is no blow to the consumer.
Are you Wenzel fans sure you want to go with him on this one? Now a consumption tax doesn’t hurt the consumer at all? So retired people (who no longer work), who have all their assets in gold bonds or actual cash* (so they won’t be hurt by declining corporate earnings or land rents) will be unaffected if Cain institutes a 9%, or for that matter a 99%, national sales tax? Do you Wenzel fans really think that can possibly be correct? If so, Cain should incorporate that into his schtick.
(NOTE: I am NOT here saying that Rothbard said a consumption tax doesn’t hurt consumers at all. As I said all along, I need to go study that argument again, because there are a lot of moving parts. I’m saying that Wenzel’s quick reaction to my post, implies such an absurdity.)
* EDIT: I originally had “gold” as the asset, but changed it to “bonds or actual cash” because the retired people would get hit with the national sales tax (perhaps) when selling off their gold holdings. Now I’m waiting for a new Wenzel post: “Murphy says holding US fiat dollars a better investment than gold!!”
US Government on Libya: Before and After
Here’s President Obama talking about the US government’s goals for Libya. You can safely move the pointer to the 1:00 mark.
Now here’s Secretary of State Hillary Clinton (HT2 LRC):
(You just know those Arab terrorists–the irrational bloodthirsty lovers of violence–are going to misinterpret the second one. So paranoid. “The Americans are out to get us!” Yeah yeah.)
Murphy Debate With Sumner in January
It’s on. (I was going to link to an Eazy-E video of the song with that title, but remembered that women and children read this blog.) We haven’t picked an official date yet, but Sumner and I will go toe-to-toe in January. The topic? Anthropogenic climate change. He’s for, I’m against. Or maybe we’ll talk about the Fed targeting NGDP instead.
At this point, after consulting with my trainers, I don’t hope to knock-out Sumner during the bout, but rather just contain him:
Oh, when I was looking through old posts for the one on consumption vs. income taxes, I saw some funny titles relating to Sumner: one, two, and three.
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