Shifting Alliances
A somewhat angry post that makes some good points. I liked this one in particular:
Looking back, one has to wonder how economists ever came to the consensus that making ultra-underpriced loans to clumsy, inflexible banks could ever possibly be a good idea. My suspicion is that it is a kind of Goodhart phenomenon: at the time these economic models were created, the metrics economists cared about did serve as good proxies for general economic health. But as they were targeted by policy, they lost their value as indicators.
If I may elaborate: In a free-market economy, there is a certain logic in adding up how much people spend on “stuff” and calling that “total output.” But in a manipulated economy, if politicians take $1 trillion from people under threat of imprisonment, then spend it on tanks, bombers, and paying people to burn marijuana plants, it’s not clear that this also contributes “$1 trillion” to the economy.
Isn’t life strange? If you had told me a year ago that I would be happily quoting from Silas Barta’s critique of Scott Sumner on macroeconomics, while at the same time fending off Gene Callahan’s comparison of me to the Nazis, well, I don’t know what I would have done. I imagine it would have involved a chortle for sure, though. Perhaps even a guffaw.
What’s the Opposite of Plagiarism?
Normally you expect someone to blog about something and not give you credit for it. But in this LRC blog post:
Charles Hugh Smith provides a remarkably concise outline of how the politically-connected Wall Street big banks and the Fed are fleecing the American people in “The Con of the Decade.” This is an excellent example of power-elite analysis, in an easy-to-follow, step-by-step format.
(Thanks to Robert Murphy for pointing out this article to me.)
…I am apparently thanked for tipping off an article I have never read. Is this a different Robert Murphy, or did Charles Burris get mixed up?
Or do I have a really bad memory?
But the President Himself Promised Me I Could Keep My Insurance!
Consulting By RPM is my corporation, which provides health insurance for my family. I recently received this letter from the insurance provider:
Dear Consulting By RPM Inc.:
Effective January 1, 2011, Bluegrass Family Health, Inc. will cease to provide coverage in the fully insured small group and large group markets in the state of Tennessee. Please accept this letter as our official notice of such discontinuation of coverage as required in accordance with the provisions of Tennessee Code Annotated Title 56, Chapter 7.
Bluegrass…received our Certificate of Authority in the state of Tennessee to transact business as a foreign Health Maintenance Organization in December 2006. We were welcomed by the Tennessee Department of Commerce and Insurance in anticipation that our presence as an additional insurer to the market would provide more choices for Tennessee consumers. Sadly, in 2009 our ability to compete in the fully insured small and large group health insurance markets was crippled by the passage of Senate Bill 2357, which requires all Health Maintenance Organizations doing business in the state of Tennessee to pay a 5.5% tax on the gross amount of all dollars collected from or on behalf of an enrollee. Undue pressure placed upon our organization by the increase of premium tax from 2% to 5.5% made competition with non Health Maintenance Organizations in Tennessee impossible.
There must be some mistake. I was happy with my pre-existing insurance coverage…?
John Conyers Is Taxed for Time
This is old news, but since I first heard it this morning, maybe the same is true for some of you:
Once the humor subsides, just think about the implications of that. Here we’ve got one of the guys who is ostensibly our representative who contributes to the formation of legislation, talking about something that may significantly alter our health care system.
And he doesn’t have two days to devote to understanding it, nor can he hire two lawyers to help him.
I asked Gene Callahan for his reaction, and he said, “I speak for the vast majority of reasonable people when I say that this episode just proves we need to give John Conyers a bigger budget to hire better help. We should also subsidize law students’ tuition.”*
* Yes that is a joke.
Do Not Read This Post If You Are Easily Offended
I was listening to NPR–I switch between that, the station that carries Glenn Beck and Rush, and the station that carries Dave Ramsey–and the announcer did the standard tease, “Warning, we are about to play some audio that may disturb you. It comes from a phone conversation Mel Gibson had over child custody…”
I decided Mel probably didn’t want me listening to his phone call, so I turned the channel. I kid you not, I actually do not know what this latest controversy is about.
Let it begin with me.
Economists Are Funny
Out of all of Arnold’s macroeconomic views, only one strikes me as truly absurd: His skepticism about the ability of central banks to affect nominal GDP and other nominal variables. …
Frankly, I don’t see why anyone would even start to hold Arnold’s view. The quantity theory of money is extremely intuitively plausible, as Hume’s famous thought experiment shows. And all of the clear-cut historical examples of large increases or decreases in the money supply support the view that large changes in the money supply change nominal GDP roughly proportionally. I agree that matters are messier when you look at small changes in the money supply and short-term fluct[u]ations. But if a theory’s intuitive and passes the clean tests, why wouldn’t you just embrace it?
Exactly! Kling offers a response, which is basically “Yes the Fed can obviously cause hyperinflation if it really wanted to, but in the moderate zone it can’t exactly control outcomes.”
Well OK, but that’s not establishing the much broader claim where Kling tries to shock everyone by claiming it is a myth that the Fed affects nominal variables. So I totally side with Bryan.
I mean, Kling’s position would be analogous to someone saying, oh I don’t know, that parents have no effect on their kids. And then you could say, “That is the most absurd statement I have ever heard. You’re saying if parents lock their kids in a closet for 8 years, that won’t affect their standardized test scores?”
And then the guy would come back and say, “Oh, of course parents can affect their kids in extreme cases. I’m just saying, reading to your kid in the womb doesn’t do anything.”
A Suggestion to Readers Who Actually Have PhDs
C’mon, admit it–for a lot of you, reading Free Advice is your guilty pleasure, sort of like listening to Abba. I don’t have the time to do this carefully, because I actually don’t have guaranteed checks every month. (And I certainly don’t get summers off.) So here’s my suggestion. You can feel free to run with this if it turns out to be right, and you don’t even need to say you got it here. Plausible deniability is the name of the game.
OK so the ECB comes out [.pdf] says fiscal austerity not only makes sense according to freshwater theory, but there are at least 3 historical episodes where governments initiated strong reductions in their deficits (primarily through spending cuts) and even in the short run, their economies rebounded.
Paul Krugman goes through and tries to pick apart all the examples, to show why they aren’t relevant now. Specifically, each of the examples relied on either cutting interest rates (which is impossible now) or boosting exports (which the whole world can’t do right now). So that’s why it’s gotta be pump-priming deficits, baby.
In a more recent post, Krugman favorably links to a new paper by Corsetti and Meier [.pdf] that looks at the multiplier conditional on there being a financial crisis. And wow! they find the multiplier in such cases can be two.
But if we turn to their discussion of the case of financial crises, they write:
Our results, shown in Figure 4, suggest that the response of consumption and output to a fiscal expansion is positive and large, once we condition on the occurrence of a financial crisis: consumption
and output rises about twice as much as the rise in spending. Correspondingly, the trade balance deteriorates significantly and persistently. The response of investment is initially muted, but appears to grow over time. In addition, the real exchange rate depreciates strongly.
As I say, I don’t have time to do this justice. But can we dismiss all of these examples the same way Krugman blew up the ECB’s examples of fiscal austerity working? In other words, to get the multiplier of two, is it important that the real exchange rate depreciates strongly? If so, then these cases are inapplicable, per Krugman’s logic: The whole world can’t have a strongly depreciated real exchange rate.
(Incidentally, I know the difference between imports and exports, and how the national income accounting identity treats rising exports as boosting output while imports as reducing it. Even so, if these historical examples for some reason rely on depreciating exchange rates to ‘work,” then Krugman can’t use them.)
Inflationist, Heal Thyself
I was reading Scott Sumner and came across this:
Benjamin Strong was President of the New York Fed during the 1920s, which effectively made him the Ben Bernanke of his time. According to Liaquat Ahamed (p. 293-94), Strong favored a policy that attempted to stabilize the economy by looking at “the trend in prices and the level of business activity.”…
A good example occurred during the very mild recession of 1927. Contrary to the Austrian view, policy wasn’t particularly easy by modern standards. Short term rates were cut to 3.5%, but that would be like 5.5% under our modern 2% inflation regime. (In those days the trend rate of inflation was roughly zero.) In any case, this policy insured that the recession was very mild, and the economy soon recovered.
Now if you know Scott, the part I’ve put in bold above should be funny. Scott has quite possibly forfeited eight years off his lifespan from all the angst he holds over economists who can’t get it out their thick skulls to STOP evaluating monetary tightness or looseness based on interest rates. Why, here’s an example of what I mean. Notice how thick Scott lays it on, for people who haven’t learned this elementary lesson:
Milton Friedman died on November 16, 2006, one year before the sub-prime crisis. I’d like to suggest that his death was the closest equivalent to the death of Strong in 1928. In 1998 Friedman pointed out that the ultra low interest rates were a sign that Japanese monetary policy was very contractionary, at a time when most people characterized the policy as highly expansionary.
There is little doubt that Friedman would have recognized the low interest rates of late 2008 were a sign of economic weakness, not easy money….
Why was Friedman so important? I see him as having played the same role among right-wing economists that Ronald Reagan did among conservatives. Reagan was really the only conservative that all sides respected; social conservatives, economic conservatives, and foreign policy (or neo-) conservatives. After he left the scene, the conservative movement cracked-up.
Friedman was respected by libertarians, monetarists, new classicals, etc. Last year I criticized Anna Schwartz for adopting the sort of neo-Austrian view that she and Friedman had strongly criticized in their Monetary History. If Friedman was still alive, and strongly insisting that money was actually far too tight, then I doubt very much that Schwartz would have gone off in another direction. It would be like Brad DeLong disagreeing with Paul Krugman on macroeconomic policy. Once in a blue moon.
Today there is no real leadership among right wing economists. They are all over the map. There are new classical types focusing on the role of labor market imperfections. Well-known monetarists like Schwartz and Meltzer insist that the real danger is easy money, not tight money. It is true that a few monetarists such as Robert Hetzel, Mike Belongia and Tim Congdon have spoken out against the view that low interest rates imply money is easy, but they aren’t as influential as Friedman. Austrians are split, with the loudest voices on the internet often drowning out the more thoughtful Austrians who recognize the dangers of a “secondary deflation.” Inflation hawks at the Fed seem to think this is a good time to get inflation down closer to 0%, where it should have been all along in their view. When a conservative like John Makin does speak out, it is treated as a sort of freak occurrence.
If only Milton Friedman had lived a few more years, and made the sort of bold clear statement he made in 1998 about the situation in Japan:
Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.
. . .
After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.
Indeed.
I can’t say every conservative would have accepted his view. But they couldn’t ignore it the way they ignore me and Earl Thompson and David Beckworth and David Glasner and Robert Hetzel and Bill Woolsey and Tim Congdon. Milton Friedman was an intellectual giant, and his voice is dearly missed.
So now you see why the first quotation from Scott is so funny.
BTW, these two quotations come from the same blog post. There is a space of four paragraphs between them.
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