Tuesday, January 31, 2012

Say it Aint So: Chomsky Not a Ron Paul Acolyte

      Yes, you can believe it: he is an Obamabot. His rationale seems pretty plausible and is even part of my reasoning:

      "I’m not a great enthusiast for Obama, as you know, from way back, but at least he’s somewhere in the real world."

      Yes he would like to see another candidate-in that we differ, I'm cool with Obama. But whoever this other candidate could be Ron Paul doesn't fit the bill for him either.

       Ready for Firedoglake to begin an offensive against him now.

       "Politics in this country now is in a state that I think has no analogue in American history and maybe nowhere in the parliamentary system. It's astonishing."

Read more:

   " I just came back from Europe, where people just can’t believe what they’re seeing here, what people are saying."

    Now wait a minute, Noam. This is a "bridge too far." Say what you want about America; Europe is in no position to be full of disbelief for us these days. You got austerity in Europe and Britain absolutely decimating any chance at a decent recovery. The only thing that could save Europe-or Japan-would be some immigration-they could use the population growth and a little less ethnic and cultural homogeneity quite honestly-and yet the whole of Europe and Britain is in an anti-immigration fervor, and the French who make so much of their commitment to liberty and democracy now don't allow Muslim women to wear Burqa's in public.

     Whatever you say about the US, Europe is in worse shape, while we are seeing some level of recovery. Indeed, if we fizzle it will likely be that Europe pulls us down to their level. On the other hand, if there is hope for Europe it's that maybe the US could somehow lift them up rather than they drag us down.

Lars Christensen Admits I Know Something About Economics

      And that's good enough for me-LOL. Hey, no matter what I appreciate his piece and now that he clarifies that we're all good. I still have all kind of questions about Market Monetarism, Monetarism and Modern Monetary Theory.

      I really am fascinated by MMT. I will say this for Lars though-he is a very able expositor of the MM view. In the comments section they suggested I'm a bit harsh on Sumner. I would say that when he said something disparaging about Diary of a Republican Hater that did not help him here at Diary.

     Then again, in all seriousness I think his arguments are sometimes off. Lately he has just been obsessed with attacking Keyneisans. His attempt to prove the multiplier is "roughly zero" are bound to get a negative rise from us over here.

    In general I will say that the blogosphere has been tremendous for economic education whether Right, Center, or Left. The Market Monetarists, while I continue to have some serious questions- .  have done a lot to bring economic arguments to the general public.

    The one thing I agree with Sumner on is that the blogosphere is a meritocracy. Let the best model win! LOL

   I will be looking a lot more into the MMT idea that there never was a barter economy. This is a truly earth shattering claim that will shake the foundations of not only all Monetarism-Market of other-but economics in general.

Lars Chistensen Writes Post About Me

      Wow! This is too much now. During the time since we started in June, 2011 we have had any number of milestones. There was the time Nick Rowe answered my post.

      There was the time Brad Delong put my post about Nick Rowe answering my previous cost on his twitterstorm-heady times.

       What particularly impressed Brad was my ability to get the words "Nick Rowe" and "Snooki" into the same post, much less sentence.

      There was the time Sumner's mentor George Selgin checked in. The time Mr. MMT Scott Fullwiler checked in. There have been many watershed momments for us here at Diary of a Republican Hater in our short time on the air so to speak.

      However, Lars Christensen provided us with another unprecedented high water mark yesterday by being so good as to write a post in answer to a previous post I had written about him and Market Monetarism.

      When I read the title of Christensen's post today, "Christensen's "Postmodernist mind fuck" I did a double take then realized he was actually referring to the above link. Those at one point were my exact words-yet at first I didn't recognize them to I read the long quote of me.

      "I have now been blogging since early October last year and I truly enjoy it. Most of my readers seem to be happy about what I write and I believe that most of my readers and commentators are quite Market Monetarist sympathies. However, there is one exception – lefty blogger Mike Sax. Yes, I called him lefty – I don’t think Mike would not disagree with this (if he called me a libertarian that would not make me angry either…). Mike is actually reading the Market Monetarist blogs and I think he pretty much understands what we are talking about. I will readily acknowledge that despite the fact that I probably disagree with 99% of what he has to say about economics and monetary theory."

      "Today I ran into a comment Mike wrote a couple a days ago about the debate about fiscal policy between on the one side the New Keynesian (Old Keynesians??) and on the other side the Market Monetarists  (and John Cochrane). Even though Mike is extremely critical of  my views I actually had quite a lot of fun reading it."

     He then quotes a long passage I wrote. The postmodern mindfuck line:

     "During the interminable tangent-a rather amusing three ring circus that Sumner led-Lars wrote a post called “There is no such thing as fiscal policy.” This is a pretty radical attack on fiscal policy. From Cochrane claiming that fiscal policy can’t work-till his bout face today-and Sumner saying it can never be as effective as monetary policy in reviving demand-we have Lars claiming it simply doesn’t exist."

    "Whoa! I guess if it doesn’t even exist we can’t use it. Ever. It’s another postmodernist mind fuck evidently. What are Cochrane and Christensen going to say to each other now? I will suggest that if you want to make any sense of market monetarism read Lars. You get it much more concisely and to the point if nothing else."

     So to me this is pretty cool. He spelt my name right-not that it's hard. I don't agree with him but I find his blog to be a learning experience. He did hower close with this comment,

     "Frankly speaking, Mike of course have no clue about economics, but he is 100% right – I should of course have said that there is no such thing as fiscal stimulus (and not policy), but then he would have had nothing to write about. Mike don’t know this, but I hate everything “postmodernist” so he succeed with his low blow."

    Low blow? I thought it was more of a "humorous quip" good enough for him to put it in the title. I thought claiming that I have no clue about economics is a much lower blow. It was he who had said,

    "Mike is actually reading the Market Monetarist blogs and I think he pretty much understands what we are talking about. I will readily acknowledge that despite the fact that I probably disagree with 99% of what he has to say about economics and monetary theory."

     If he admits that I do read his blog and I pretty much understand it-Sumner's move is to always claim that you could not have read him, that you read maybe one sentence and gave in to your Keynesian prejudices or whatever-how can he claim I am clueless about economics? I left him a comment,

    "See I was liking you Lars till that last line. But that makes you sound so Sumner-like. You know condescending, dismissive of anyone outside the (Chicago) Groves of Academe."

    The point of his post was in the next-and last paragraph:

    "Anyway, let me say it again fiscal policy is not important. People like Paul Krugman (and Mike Sax) think that we need massive fiscal stimulus to take us out of the slump in Europe and the US and some think (for example European policy makers) think that the only solution is fiscal austerity. I think both parties are wrong – lets fix monetary policy and then we don’t have to worry (too much) about fiscal policy (other than balancing the government budgets in the medium to long run…). This is why I find it so utterly borrowing to discuss fiscal policy…"

    If he finds it boring he knows who to discuss that with-his buddy Scott Sumner. As for me and Krugman-happy to be put in his class-thinking we need massive fiscal stimulus, I don't rule out monetary policy but in any case we are getting neither. It is his buddy Scott who lately has been making attacks on fiscal stimulus more important than any other issue and has escalated this-possibly needless war of words particularly for the MMers who hope to "co-opt" us Keynesians.

   Krugman, Delong, Romer, at al, all said, "Sure, NGDP. It's worth a shot." Sumner is pushing through an open door.



There Sumner Goes Again: The EMH Canard

      He has chutzpah I'll give him that. He has a post out today entitled, "Are there any good arguments against the EMH?" Well actually yes. There are many.

      The better question would be "Are there any good arguments for the EMH?" to which the answer is "If there are he didn't mention them in this post."

       Sumner's whole argument here amounts to claiming that the year after year rate of returns of hedge funds are not very high. As if the only way you could possibly refute EMH are if hedge fund rate of returns are very high.

       For one thing if EMH was such a good theory why can't he offer any maroceconomic cases for it, the best he can do is the very crude comparison of the hedge fund rate vs. the S&P? To say that the S&P rate is 10% proves nothing either.

       It surely doesn't mean that everyone, or even most people who get into equities will realize a 10% return. Let's listen to his "irrefutable argument" for EMH:

       "Over the years I’ve swatted away lots of arguments against the Efficient Markets Hypothesis.  The question is not whether the EMH is “true,” how could it be?  Almost no economic model is precisely true.  The question is whether it is useful.  I find the EMH useful, and anti-EMH models to be almost completely worthless.  I’m still looking for the model that will tell me how to beat the stock market.  Just when I was starting to warm up to Shiller’s model, he missed the huge bull market of 2009-11."

      He finds it useful-for what exactly he never tells us. He says no economic model is precisely true but he doesn't even give it any economic analysis just claims that as Shiller didn't beat the market, EMH must be true. Very weak argument. Is Sumner himself a market participant? If not what use is he getting from EMH?

      Does he mean useful as a market participant or an economist?

       "There is no doubt that hedge-fund managers have been good at making money for themselves. Many of America’s recently minted billionaires grew rich from hedge clippings. But as a new book* by Simon Lack, who spent many years studying hedge funds at JPMorgan, points out, it is hard to think of any clients that have become rich by investing in hedge funds (whereas Warren Buffett has made millionaires of many of his original investors). Indeed, since 1998, the effective return to hedge-fund clients has only been 2.1% a year, half the return they could have achieved by investing in boring old Treasury bills."

       Since the top of the bull market in 2000 the S&P adjusted for inflation is actually lower now and the Nasdaq is of course much lower. I feel that that there are two different levels that he blurs the lines on-the EMH as a theory useful for economic models-his stock and trade-and as useful for a market participant-as far as I know not his stock in trade.

      Yet he argues that it is useful and doesn't explain how but the argument he employs is all about market returns not economic models.

      As is typical for Scott he is seizing on one thing-this time hedge fund returns-and assuming he can make his entire point from this one premise not realizing that even if we grant it to him he is far from in pay dirt.

      He did this when he was arguing against MMT-claiming that without the Quantity Theory of Money (QMT) you can't explain the price level-ergo QMT must be right and MMT must be wrong. Only problem is that MMT actually does believe in QMT-of a type; for them it holds but only over the long run-so even if we grant him that QMT is the only way to explain the price level he still hasn't laid a glove on MMT.

     So it is here that whatever you make of hedge fund returns this hardly proves EMH. As someone who has played the market both as a buy and hold investor at times and as a trader at times, I doubt you will find many on the trading floor who believe in EMH.

     I will say this about the two strategies-here implicitly Sumner is assuming that a successful buy and hold strategy proves EMH. You can't get rich playing buy and hold as even if you get the 10% return Sumner wants you to think you can this is not going to make anyone rich. At best it is a high yield savings account, but with considerably more risk.

     On the other hand you can make a lot of money at trading, you can in fact get rich, In 2008 it was possible to make a lot of money quickly going short the banks, etc. Since then starting in March, 2009 it has been a time of buy and hold. Still this is a strategy that few without deep pockets have been able to afford during this period.


Monday, January 30, 2012

Romney Cash Sinks Gingrich

       While I would love to see Gingrich win in Florida as it would truly throw the GOP establishment into turmoil, it's looking now that this won't happen.

        Last Tuesday Gingrich was shown with as much as a 6 point lead-all polls showed him at least even. However since then he has sunk and now most posts show him down by at least 8 points, with some showing him down by as much as 20.

        What did this seems to be Romney's hit machine-the Super PACs that can donate limitless cash. They have hit him hard and he seems to be hurt by this. On Thursday night he was not on the top of his game but was mostly off balance complaining about the hit machine.

        While what he said was true it didn't do much to advance his cause. It's too bad. I would love to see Gingrich win this thing but even without an outright win, to drag out this primary as long as possible. This is supposed to be Romney's to lose.

         If he were to lose tomorrow this would be terrible for his image even if he does finally win out. However Newt this past week has looked unable to keep up with the Romney campaign's extra dollars.

         Don't get me wrong. While I would love to see Newt win as I think he would be a joke as a general election opponent for Obama, there is more than enough to go on the attack against Mitt. He has a big old glass jaw which we might call his general lack of empathy with the lives of most Americans.

        His profile is all wrong. He is Mr. One Percent in a time when Americans have had it up to here with the top one percent-really the top .001 percent. However, FDR came from a Hyde Park, New York patrician background that was closest to aristocratic you can get in this country-Romney with his inherited millions is pretty close though. And his Bain Capital loot are of course unearned income taxes at the unjustly lower capital gains tax rate-have yet ot hear a defense of this practice that convinces me.

       However, FDR though patrician, knew how to empathize and sympathize with most nonrich Americans even though these were not his own personal experiences. Romney has already shown he is congenitally incapable of doing this.

      I would love to lead a campaign against Romney. My first attack ad on him that I would play early and often would be of his insulting the Occupy Wall Street activist he questioned him about income inequality by claiming that the guy was "dividing this country. America is right and you are wrong." Romney shows how weak his political skills are there.

      No matter what policies he wants and even if he can't possibly please this activist, he can certainly take a tone that shows he understands his problems and wants to do something about them. Romney in a way is the worst face to show the the country right now. His glass jaw will need a lot of bandages by the end of any campaign.


German Terms For a Greek Rescue: Colonization

    Bill Mitchel over at billy blog has this great headline to today's post, "Greece to leave Eurozone and become a Germany colony."

     Sixty five years after the Germans had to foreswear war forever and were broken up, we see that Germany hasn't rejoined the world of peaceful nations, the world has joined Germany!

      Scott Fullweiler over at New Economic Perspectives has a good take on what this is about: a German warning about what the terms of any bailout might be for Spain, Portugal, Italy, Ireland, et al.

      " how do you preclude Portugal, Ireland and, indeed, Spain from asking for the same deal as Greece, if the negotiations succeed?"

     "Answer; you can't. So the Germans throw a politically impossible demand in front of the Greeks, in effect saying, "No more money unless you effectively surrender your national sovereignty." And that's the implied warning ahead for the other periphery countries which look to secure the deal currently on the table for Greece.
   "In effect, the Germans (behind the auspices of the troika) are saying, "It's fiscal austerity on our terms. You try to renegotiate like the Greeks and we take you over. The other alternative is that you leave.".

   "Anschluss economics, plain and simple."

   "Is this too harsh an assessment? Well, when their national interests are at stake, the Germans are perfectly prepared to shed the “good European” persona and play hardball.   Think back to how the Bundesbank engineered the departure of Britain from the ERM back in the early 1990s, and you've got the template for today. By publicly suggesting that sterling was overvalued and refusing to offer support to the British pound (in contrast to its subsequent defence of the French franc), then BUBA President Helmut Schlesinger virtually assured the UK's ejection from the Exchange Rate Mechanism. Let's face it: history shows that Germany doesn't do "subtle" very well. This looks like a blitzkrieg, plain and simple. Spain, Ireland, Portugal and Italy - you have been warned. "

Was Britian the First Test for NGDP Targeting?

     Let's hope not, as if it is, it's an abysmal failure. Sumner had a post yesterday "What's wrong with Britain?"

     The answer to that is plenty. Certainly to those of us who are Keynesians, it's clear that a big part of the problem is Cameron's fiscal austerity.

      Now Sumners claims in an answer in the comments section to me from the link above, that

      " I have no opinion on Cameron, and never did. Maybe he is a hawk. But I don’t see evidence of austerity, unless I’m missing something. I will concede that the deficit is smaller than in 2010"

      Here he is confounding two questions-whether there was fiscal austerity and the existence of a budget deficit. A budget deficit does not prove there was not austerity. Indeed what we have learned from Greece is austerity can even worsen a deficit. The problem with austerity in the middle of a recession is it exacerbates a loss in demand-Sumner here admits the problem is a drop in AD.

     He claims that he has no opinion about Cameron, never did, and that "maybe he is a hawk." For the record Sumner certainly cannot claim to having never had an opinion about Cameron,

   "There is currently a fierce debate in the UK over the coalition government’s plans for fiscal austerity.  Many argue it will lead to high unemployment.  But if that’s the case, then the criticism of the BOE for being too easy is borderline schizophrenic.  People can’t have it both ways.  If the UK has an AD problem, then, ipso facto, high inflation is not a problem.  Indeed it needs to be even higher.  (Draw an AS/AD diagram if you don’t believe me.  QED.)  If they don’t have an AD problem, then there are no valid grounds for criticizing Cameron’s fiscal austerity.  So which is it?  And for those Brits who do worry about inflation, why aren’t you demanding even greater fiscal austerity?  Why blame the BOE?"

     Sumner published this January 13, 2011

      He definitely knows here that Cameron had plans for fiscal austerity though he is now pleading agnosticism of whether or not he did, 'maybe he's a fiscal hawk.'  Predictably Sumner is claiming that the reason for Britain's weakness is lack of monetary easing. Yet the Bank of England has been more activist than most central banks. In the same post, Sumner quoted this:

    "Very subtly, Bank insiders, including members of the monetary policy committee, are beginning to complain that the criticism is overblown and the Bank should not be in the line of fire for specific price rises about which it can do little. Would it be better to bring down inflation quickly with a large immediate tightening of monetary policy and ignore the consequence on jobs and growth, some insiders ask in rhetorical asides. Others are open that the Bank is really targeting nominal gross domestic product growth of about 5 per cent a year regardless that this is not consistent with the Bank’s strict 2 per cent inflation target objective."

     What Sumner had claimed was that Cameron's austerity will not be contractive if the BOE at the same time aggressively eases. As this is not the case he is left to his usual claim that monetary policy has even in Britain been too tight.

    Cameron's admirers were legion prior to the recent numbers came out. Delong quotes the "centrist" David Brock gushing all over himself about Cameron last year,

    " David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.” He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”

Sunday, January 29, 2012

Why America is Not in Decline

      It's hard to believe but more and more it's clear that we are the healthiest among the First World countries. Britain is on the verge of returning to recession, Eurozone is in abysmal crisis, Japan as been stuck in mediocre growth for years. For more on how  the US currency hegemony isn't over see   This is an excellent blog by the way.

     There is some hope that the Eurozone might finally be on the road solving a couple of their problems, but still if there if you had to bet-and I guess there are lot of investors who make these kind of bets-where the brightest future will be you have to say America.

       The reasons are one: we haven't actually undergone any austerity here. In the Summer during the fiasco over the debt limit it looked bad but that proved to be the nadir on the austerity debate. No one talks about it anymore. That debate cost the President but it cost the GOP even more and now no one wants to get into that again. Many thought Obama was selling out but in retrospect he won that fight big time.

      No doubt America has certain natural advantages as well. We have such a big, resource rich country, surrounded by two oceans. This is what helped us become such a great power in the first place. Then you throw in the fact that we continue to have major population growth while Europe and Japan suffer decline.

     A major reason Japan looks so weak is the population decline it suffered starting in 1990. Ironically it's the very population growth here in the US, the rise in particularly Hispanic immigration that bodes well for the future. In Europe and Britain there is total hysteria about immigration which is unfortunate as this is exactly what these declining, homogeneous populations need. If they would let immigrants in large numbers that would help a lot.

     But the people of Britain and Europe believe that immigrants steal jobs and besides are very prejudiced. France actually has an anti-Muslim law on the books-no Burquas in public.

     As I mentioned in previous posts I'm reading this interesting book by Correlli Barnett "The Lost victory: British Dreams, British Realities 1945-1950" and what comes out so clearly is that by this time Britain was wholly as Barnett puts it a "second rate power" who still dreamed of the 19th century when it ruled the world.

    The analogy between the decline of the British empire at the start of the 20th century and us here in the start of this century has often been drawn. However for the reasons mentioned above-unlike Britain we have a large, boundless, country with tremendous resources and an increasing, heterogeneous population, I don't see it.

    We're in considerably better shape than Britain was 100 years ago.

Saturday, January 28, 2012

Market Monetarist-MMT Smackdown 2.0

      In our first attempt at a smackdown we lead with Market Monetarist extraordinaire Scott Sumner's attempt to take down MMT by proving that you can't explain the price level without the Quantity Theory of Money (QMT).

      Implicit in this is the assumption that MMT rejects the QMT. However in reading Scott Fullweiler's answer to Sumner it becomes clear that Sumner had made this assumption much too hastily as Fullweiler revealed that MMTers don't actually reject QTM as such. Incidentally this is not at all atypical of Sumner who always claims that his views have been misconstrued to misconstrue the views of "fiscalists" of various stripes and then argue against a straw man.

      With the considerable heavy weather he built up in defying anyone to explain the price level without QTM it sure was anticlimatic to discover that MMT doesn't deny QTM. As a MMT reader named Rodney

      "In the long run, The qtm theory holds true. the point is, money creation in itself does not affect the price level. Spending does. If you leave a trillion dollars on times square and nobody spends it does it affect teh price level. no. not until someone spends it. Thats why the fed cannot create inflation. It doesn't spend, it just swaps one form of asset for another. Bonds are money people are saving not spending so is it going to be inflationary. Probably not."

       My point in the "smackdown" idea is to get to the bottom of what really are the different monetary visions of the two unorthodox systems that the Economist recently featured-along with Austrianism but that of course has been around a long time.

       As we saw in the first "smackdown" Sumner believed he achieved a TKO but was wrong as MMT doesn't deny QMT "over the long run." Still Rodney's claim that the Fed cannot create inflation is certainly a very provocative claim and flies in the face of everything that Market Monetarism believes in.

        Today I read a working paper written by MMTer Stephanie Bell in 1998 called "The Hierarchy of Money" which gave me a much better idea of the true differences between MMT and MM. It turns out they are profound.

        Interestingly I had sort of touched on this issue myself the other day in another post about MM regarding a post written by MMer Lars Christensen in his Market Monetarism blog.


         What I found very interesting is that Christensen in his post that declared there is no such thing as fiscal policy indicated that the idea of money neutrality is a cardinal pillar of MM's understanding of the monetary system.

          ""in a barter economy fiscal policy is a purely redistributional exercise, but it will have no impact on “aggregate demand"

            "for fiscal policy to influence aggregate demand we need to introduce money and sticky prices and wages in our model. This in my view demonstrates the first problem with the Keynesian thinking about fiscal policy. Keynesians do often not realise that money is completely key to how they make fiscal policy have an impact on aggregate demand."

            This radical belief in money neutrality is the locus of the really important difference between MM and MMT. What Market Monetarism-and all monetarism in reality-comes down to is the belief that money is wholly neutral or should be-it's the job of the Fed to eliminate the intermittent distortions in the monetary system.

            Strange then as it sounds for these apologists of unfettered libertarian capitalism, to regard money itself as the root of all evil.  So I wrote,

            "It's kind of like the old Catholic church that loves children but hates how they are created. The MMers are also like the academic philosopher who believes that apprearance is be the basis of evil in the world. For the monetarist: money is this distorting appearance. What you always get with docrines of Original Sin is the vexing question of casuality: in a world run by an All-PowerFul, Beneficient God how is evil possible? In our case how did money get into the world?  What I also find interesting is to imagine a debate between the Market Monetarists and the Modern Monetary Theory people."

            I was interested in the debate but only now in reading Stephanie Bell';s paper do I see what the important sticking point is. It is this whole notion of money neutrality, that without money our economy works the same as a barter economy.

           What emerges from reading Bell is that this idea must be wrong in part because it is open to question that barter economies ever existed.


            As Ms. Bell shows the debate between Market Monetarism and Modern Monetary Theory goes back to a debate that started in the 16th century between Metallism and Chartism. Essentially Metallism believes that there was an age of barter and money was invented to correct for inefficiencies form the barter system. This development is supposed to have occurred spontaneously in the private sector.

             Metallists (the modern day Metalists are the Monetarists of all stripes) believe that money is able to function as the medium of exchange based on it having an intrinsic value beyond its function as money.

              The Chartists' view is fundamentally different. There never was a barter economy. Money derives its value not by having independent intrinsic value on the private market but because the government declares something money, the proper mean of exchange in order to be able to pay government taxes.

              The Chartist view therefore gives the government a large role indeed the directing role. The government kind of functions like the God of Hegel and Kant who gives money its value by simply positing it. For the Metallists the government's role at most is limited to codifying the social custom of exchanging money.




Why Britain, Europe and Japan Need More Immigration

       To suggest such a thing would be a political non-starter in these countries but it is a major reason the future in these countries is not exciting.

       Indeed in Europe there is an anti-immigration fervor, in France that likes to flatter itself as a champion for democratic values they have taken the extreme step of a law again Muslim women wearing a Burqa in public.

       I have no idea how you could achieve more immigration politically but that's what is needed. What all these countries have in common and what puts them at a disadvantage vs. the US is they are homogeneous countries with declining birth rates and populations.

      What has has always helped the US so is of course our large, expansive country so rich in resources-Britain after WWII was actually no longer able to feed itself. It's hard to imagine that ever happening here.

       There's been some discussion over whether Japan suffered one or two lost decades-Krugman and Noah Smith say no-Matt Ygelsias says yes.

         If you measure it in terms of GDP growth the answer is yes. I tend to think that Yglesias is at least right that while the Japanese coped in the 2000s before the 2008 crisis they didn't thrive and could have. Krugman agrees that with better policy it would have been better.

        Yet no doubt part of the trouble for Japan was that until 1990-during their economic boom years-their population was growing-since 1990 it has been declining. No doubt their post 1990 performance has been hurt by this demographic figure, so if you handicap for this it doesn't look as bad in the 2000s. Still though even if it wasn't a recession during those years it certainly seemed like sub optimal growth.

The Case For Obama: US and Britsh Economic Bifurcation

     Does "bifurcation" happen? Could you have a scenario with an improved US economy that is getting better with a Europe and Britain going the other way? Whether or not this can continue in the long term in the short term this has been what we are seeing.

     While Britain has avoided the debt crisis of the Euro countries with their lack of effective monetary policy, this has not stopped the country from continuing to see a weakening economy.

      While US growth picked up in the second half of last year, the British actually went back into contraction. It is now being argued that for the British this crisis has been worse than the Depression. This is in sharp distinction to us.

        "the ongoing slump in Britain is now longer and deeper than the slump in the 1930s."

         Bill Mitchell explains the difference between the American-admittedly mild-expansion, and the British continued contraction:

         "the major difference between the two economies relates to the conduct of the government in each case. The UK government has been announcing its intention to impose harsh fiscal austerity on the national economy since the day it took office. The fact is that most of the spending cuts are still to come, which doesn’t augur well for 2012, the spending associated with the Olympic Games notwithstanding.

         Of course Britain had already been in depression in 1925-they had never really recovered from WWI-in both WWI and WWII Europe was much worse for wear whereas we prospered greatly. Not that I feel bad-they dragged us into it.

         "the major difference between the two economies relates to the conduct of the government in each case. The UK government has been announcing its intention to impose harsh fiscal austerity on the national economy since the day it took office. The fact is that most of the spending cuts are still to come, which doesn’t augur well for 2012, the spending associated with the Olympic Games notwithstanding."

        "It is highly likely that the “announcement effect” by the government of its intention to harshly cut spending has further eroded confidence among households and business firms, already labouring under the deflationary burden of high unemployment."

         "By way of contrast, while there has been austerity rhetoric in the US, which is probably held back private spending, the unresolved nature of the current political impasse has not translated into any serious budget cuts to date. The current US regime is still talking job creation and growth, which is far removed from the rhetoric that emerges from the British government."

         There has been austerity talk in the US but not much lately-very little since the Summer debacle over raising the debt ceiling, If the "current US regime" is still talking job creation and growth with no serious budget cuts to date this is thanks to Obama. He was the last and best defense from austerity. Although the firebaggers don't like it  the fact that Obama is not David Cameron, and electing him is the only way to avoid David Cameron in America is reason enough to vote for him come November. If we have not suffered austerity he's a big reason we haven't.


Friday, January 27, 2012

Wanted: More Inflation

     Bernanke's speech the other day got some positive reviews. Sumner thinks it shows that he's more on the dovish side. Maybe. I think that may be true though I think he may play for the "Center" as is common for the chief executive-this goes back to 19th century France when the Prime Minster positioned himself literally in the center between the conservatives-who sat to his right-and the radicals-who sat to his left.

    He may be dovish but if so he is probably more moderately dovish than the real doves like the Chicago Fed President. Sumner of course couldn't resist discussing how Bernanke and the Fed may react to fiscal stimulus:

    "On the side of a positive multiplier, Bernanke noted that zero interest rates would still be appropriate with an even stronger economy.  That could be viewed as implying that monetary policy is currently too tight.  He did note that there were some risks associated with unconventional policies.  I inferred that he saw these “risks” (which I don’t see as being real) as being one factor holding the Fed back.  So perhaps the fiscal authorities could do something without triggering a monetary tightening."

     "However Bernanke also made a number of statements that cut the other way.  He repeatedly emphasized that they’d be watching the economy closely over the coming months, and the Fed would provide additional stimulus if the indicators weren’t satisfactory.  He kept emphasizing that they take their dual mandate seriously, and that unemployment is too high by any reasonable estimate of the natural rate.  Also that inflation is likely to remain low.  The takeaway for me was that Bernanke made it quite clear that he feels the Fed needs to be active, and how much they do depends on the state of the economy.  That implies a near-zero multiplier.  Or at the very least, that the multiplier is considerably lower than the figure implied by Keynesian models."

    Sumner finally wrote a post that wasn't mainly about razzing Krugman and Keynesianism but he had to slip that in. The new blog Not the Treasury View could not have come at a better time.

    Krugman agrees that Bernanke's speech was at least an improvement but he says that what is also needed is a raise in the long term inflation target. He actually says that we need a long term inflation target of 4-5%. I for one like that idea a lot-a whole lot actually-but I feel like it would be too much of a cognitive dissonance for the hawks on the Fed in the short term.

     When you look at the cumulative statement and votes of the FOMC there is some reason for optimism that we may see a -very-moderately dovish Fed. In the short term I suspect they're not ready for that. Still there is at least some good news-you have a number of ideas out there. Krugman cites Oliver Blanchard the IMF President who advocated the higher inflation target in 2009.

     Note the difference with what Krugman is saying here than with Sumner's prescription. Sumner advocates a NGDP target for the Fed and futures market for NGDP. It's yet another species of Friedman's policy rule to remove as much as possible any monetary distortion-ie, the distortions that money itself is believed to introduce into the pure market economy-as we saw in a previous post, Lars Christensen believes that the pure market economy that Market Monetarism seeks acts like a pure barter economy.

    In theory it would seem that whether we raise the inflation target or we come up with a NGDP target it amounts to the same thing-provided the NGDP target is not too low. If we presume over Keynes' "long run" the U.S. economy grows by about 3% and the inflation target is 2% we could declare a 5% NGDP target.

    This would allow for the time being a higher level of inflation as growth is lower. But it seems to me that the endgame of Sumner and the rest of the Market Monetarists is what they so often claim: a long term "small, gentle" deflation. Sumner's target certainly is not anymore than at most 5.5%. He often talks about a 4.5% rate-this assuming historical GDP-leaves little room for inflation of more than at most 2%. Sumner stresses the idea that once the target is picked it must be stuck to rigidly.

      The idea of Krugman-and Blanchard and others for a 4-5% inflation target would imply a long term NGDP rate of 7-8% way above what Sumner would want I presume. Sumner does say that he thinks if we can't have NGDP targeting he would support inflation targeting as long as it is smoother over. That is to say that even if we insist on the 2% rate, as we have had rate lower than that since 2008 it would be acceptable over the near term to have higher inflation just to smooth the inflation rate at 2%. Again what is different from Krugman and Blanchard is that the higher target is long term
      Blanchard gives an important reason for a higher inflation target in the long term

       "Higher average inflation, and thus higher nominal interest rates to start with, would have made it possible to cut interest rates more, thereby probably reducing the drop in output and the deterioration of fiscal positions.

         Krugman then points to another reason for a higher long term rate

         "I would add, however, that there’s another case for a higher inflation rate — an argument made most forcefully by Akerlof, Dickens, and Perry (pdf). It goes like this: even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis."

         "I think this is especially important in the European context. As I’ve been writing in a number of posts, the period 2000-2008 saw a huge divergence in price levels between the capital-inflow nations of the European periphery and the European core."

        "Almost surely, that divergence now has to be reduced. Yet with a low overall inflation rate for the eurozone, that means large-scale deflation in the overvalued economies if convergence is to happen any time in, say, the next 5-10 years."

         "The task would be a lot easier if the eurozone had 4 percent inflation instead of 2.

        "Blanchard is the President of the IMF and for him to advocate this might seem to indicate hope for the higher target. However this is more his personal view than that of the institution.



Thursday, January 26, 2012

It's On: Time for a Market Monetarist-MMT Smackdown

     Of course as Cullen Roche already has a schism with MMT-his new school is Monetary Realism-who can keep up? Still I do think that comparing and contrasting these two systems that have made a big enough name for themselves on the Internet that the Economist wrote a featured story about them would be fruitful, a real learning opportunity.

     While I have given Sumner a hard time lately-he to my mind deserves it as he keeps being so snarky about the Keynesians and "fiscalists"-his blog has a huge following and I think it's deserved even though I question some of his commitments.

     Sumner did try a few times last year to have a meeting of minds of a sort between the MMTers and his Market Monetarists.

     One try was a post he wrote about the Quantity Theory of Money (QTM). The point of this post was that there is no way to think about the price level without the QTM. This lead to some quite lively debates in the comments section.

      "This is sort of a response to some Keynesian/fiscal theory/Post Keynesian/MMT theories I’ve seen floating around on the Internet.  Theories that deny open market purchases are inflationary, because you are just exchanging one form of government debt for another."

       So we see that Scott is already biting off quite a lot, trying to paint with a pretty wide brush. He wants to knock them all off with one punch.
       His approach for knocking all these theories out is already indicated in the title "Are there any non-QTM explanations of the price level?" Sorry to give the punchline but his answer is no.

       "Here’s my problem with all non-QTM models.  Suppose I’m right that only the QTM can explain the current price level.  Then it stands to reason that only the QTM can explain the price level in 2021.  Then it stands to reason that only the QTM can explain the inflation rate between 2011 and 2021.  Now it is true that a change in the money supply will have certain effects on nominal interest rates, economic slack, etc, depending on whether the monetary injections were expected or not.  And you can try to model the inflation rate using those changes in interest rates, economic slack, inflation expectations, etc.  But that’s really a roundabout way of getting at the problem.  If the QTM says that the price level in 2012 will be 47% higher due to changes in the monetary base, plus changes in the public’s desire to hold currency as a ratio or NGDP, then either the non-QTM approaches also give you the 47% answer, or they are wrong."

     So notice that Sumner has made some significant leaps and assumptions. His entire approach in showing up these various fiscalist, Keynesian and MMT theories is predicated on the idea that they are all non-QTM models.

     In the comments section as always when he has written about MMT he was inundated with comments. One MMTer who went toe to toe with all comers including Market Monetarist extraordinaire Lars Christensen-Lars created the phrase Market Monetarist-was Mark S.

    Lars declares, "Scott, It is simply unbelievable that so many economists do not accept QTM as it is not only logically the only valid price level and inflation theory, but probably also the best empirically documented economic relationship in global history."

    "To not accept QTM is like not accepting the law of supply and demand. If more money is printed then the value of money of course drops. As the value of money is the inverse of the general price level – prices will go up when the money supply growth faster than money demand. How could anybody believe otherwise???"

    "Keynesian economic – New and Old – has led to a serious misunderstanding of money and prices and there is a need to restate some facts:

      1) Interest rates are not the price of money, but of loanable funds
      2) GDP growth and lower unemployment does not lead to inflation
     3) Rising oil prices is an increase in a relative price and not in the general price level
     4) Inflation is always and everywhere a monetary phenomenon…
     5) And if you fear deflation then just appoint Gideon Gono of ECB chief or Fed governor…

     Mark S fires back "Lots wrong here as usual. The QTM assumes that an increase in bank reserves will lead to increased lending and an increase in the money supply. But I’ve already taught you that banks never ever lend their reserves. That is simply not how modern banking works. Now, I know you’ve admitted that you don’t understand banking very well, but you need to stop making this assumption that more reserves = more money in the economy. It’s simply not true. "

     "How do I know this? I work at a friggin bank. I know exactly how and why we loan money. And it has nothing to do with how many reserves the Fed fires into the economy. It has only to do with our capital position."

     "MarkS, What if you put 1 trillion dollars on Time Square every day won’t you get inflation? And if not, why not just put 100 trillion there every hour…And why do you obsess about the banking sector? There is no reason to assume that the injection of money into the economy happens through the banking sector…"

   " And if QTM is wrong, then what is your inflation theory? Magic??"

     Mark replies to Lars,

     "Lars, You clearly don’t understand modern banking either. The Fed does not have the power to “put 1 trillion dollars on Time Square”. The Fed only has the power to alter reserve balances WITHIN the banking system. Now, people like Scott falsely assume that more reserves = more lending = more money, but it’s totally dead wrong. Banks don’t lend their reserves. That’s just not how it works."

     "So, the only way for the Federal government to “put 1 trillion dollars on Time Square” would be through deficit spending. Would that be inflationary. Hell yes it would."

     "Scott’s whole framework is wrong because he doesn’t understand modern banking (something he has admitted to on this very site).

    Scott Fullwiler thoroughly crushes you here:

    Now whether or not Fullwiler crushes Sumner here is another question. What is clear though is that Fullwiler declares that, "Finally, just as an aside,Sumner concludes with, “So here’s my question: Are there any non-quantity theoretic models of the price level?” Of course, the price level itself can be anything depending on which year uses as a base year and the value at which the base year is set, so what’s really of interest is understanding changes in the price level instead of the level itself. Interestingly, MMT is also a quantity-theoretic model of changes in the price level. The differences are (1) net financial assets of the non-government sector, rather than traditional monetary aggregates, are the MMT’ers preferred measure of “money,” and (2) desired leveraging of the non-government sector is akin to what one might call “velocity.” In MMT, the two of those together (net financial assets of the non-government sector relative to leveraging of existing income) set aggregate demand and ultimately changes in the price level, at least the changes that are demand-driven."

    In other words, according to Fullwiler, MMT actually is itself a quantity-theoretic model. So Sumner spends a whole post insisting that there's no way to understand the price level without the QTM which is supposed to prove that this is the Achilles Heel of MMT, and it turns out that MMT actually does believe in the QTM.

First MMT Now Monetary Realism?!! Cullen Roche

      I was just thinking about how what I'd like to see is a real smackdown between Market Monetarism and Modern Monetary Theory.

      I've spent a lot of time lately on MM with Sumner and his interminable attacks on "fiscalism" and Lars Christensen's claim that 'there is no such thing as fiscal policy' though what he actually means is there is no such thing as fiscal stimulus.

      So I thought to maybe get into this smackdown we should begin with reminding myself of MMT as I haven't read much about it lately.

      I find Cullen Roche a pretty good expositor of MMT theory-Scott Fullwiler is another. So I was checking Cullen's Understanding the Modern Monetary System.

       What first stands out is that he has changed it since I last looked it over. Turns out there's been some kind of "schism" where he now calls his own school of theory "Monetary Realism." I was just getting use to MMT now it's MR?

        In any case I like a lot of what I see. I appreciate this understanding of the relationship between the government and the private sector:

        "The government is an entity created by the people and for the people. It exists to further the prosperity of the private sector – NOT to benefit at its expense. If this entity is allowed to exist for its own benefit or becomes corrupted by a concentration of power or abuse of its monopoly supplier powers it will become susceptible to dissolution via the populace’s rejection of that government."

        "Governments should be actively involved in regulating and helping build the infrastructure within which the private sector can generate economic growth. The economy is a complex dynamical system with irrational participants. It cannot be expected to regulate itself or behave rationally at all times. Therefore, some level of government intervention and involvement is not only beneficial, but necessary. But ultimately, it must be the private sector that is the driver of economic growth. While government can aid in this process it cannot be expected to be the primary driver of innovation, productivity and growth – the primary drivers of living standards and ultimately the most important linkage in currency viability."

        Here the difference between MMT-and Monetary Realism, on most of this MR is still MMT; as to what makes them different more below-and any libertarian economic systems, be they Market Monetarist, traditional Monetarist, or Austrian could not be more stark. Whereas libertarianism systems all see the government and the market in some sort of Manichean struggle between good-the market-and evil-the government-MMT's understanding of the two of in a kind of partnership-I would argue a kind of dialectical partnership-is for me a vast improvement. In reality I don't believe the government is all knowing but neither is the private market.

      So where exactly is the deviation in MR? According to Roche,

       "Monetary Realism is similar to Modern Monetary Theory (MMT) in many ways and utilizes many core aspects of MMT, but instead focuses on operational realities of the monetary system and attempts to eliminate the theoretical aspects of MMT that generate substantial political divisiveness and confusion."

       Hmmm. What are these theoretical aspects that generate "political divisiness and confusion?"

         "Monetary Realism doesn’t view large current account deficits as sustainable as they require ever larger global imbalances, larger budget deficits and potentially result in a reduced standard of living as the society turns increasingly into a society of consumers as opposed to producers."

        "MMT lacks emphasis on the idea that producers matter as much, if not more than consumers in the effort to create better living standards in the world.   This is not to imply that Monetary Realism doesn’t appreciate consumption, but we view consumption and production as two sides of the same coin rather than a tug-of-war.  Maintaining a balance and focus on each is important."

         "We do not view taxes as being entirely sufficient in justifying the monopolist argument.  Although important, taxes and enforcement alone are not enough to maintain a stable monetary system.  We instead focus on the living standards of the people within that monetary system with the understanding that any monetary system is only as stable as the living standards of those who create it.  Money might be a creature of the state, but the state is a creature of the people.  Resources precede taxation so while taxation plays a crucial role in binding the monetary system they are by no means the only link (or even the most important link) in the chain.  The monopolist argument that MMT uses is often taken to an extreme in justifying government interaction in the private sector."

         "We reject the MMT idea that a Job Guarantee (JG) is a necessary component of any monetary system.  The JG could create unintended consequences which reduce the potential living standards of the society over a multi-generational period. In addition, since the JG is unlikely to be demand supportive or an effective inflation buffer, it will rely heavily on other policies as a supplement.  We believe the government should focus on other policy measures to establish an environment of full employment and price stability."

         I must admit that none of these differences on the face of them are much to my taste. Cullen seems to think that apoliticalness is what is important about MMT-more so now in MR.

        "One important element of Monetary Realism is its political agnosticism. There are components of Monetary Realism that tend to be left leaning, however, there are also components of Monetary Realism that are right leaning. For instance, Monetary Realism is agreeable to many right leaning economists because it favors lower taxes, reducing (or ending) the Fed’s role in the monetary system and focusing on efficiency of government (reducing wasteful spending and malinvestment). Monetary Realism is also agreeable to left leaning economists because it favors government deficits, tighter bank regulations and a focus on full productivity (hence full employment). Importantly, it is neither an offshoot of Keynesianism, Monetarism nor Austrian economics, though there are components of each involved to some extent. Rather, Monetary Realism is an offshoot of many different theoretical frameworks with GF Knapp, JM Keynes, Abba Lerner, Hyman Minsky, Friedrich Hayek and Wynne Godley playing central roles in helping to craft the thinking behind it."

     While for the most part I must admit that I can't say that any of these changes from MMT to MR at least at first glance seem to be for the best-a major attractive aspect of MMT is that it rescues us from deficit hysteria. Cullen seems to be suggesting that in MR it makes a comeback. The last thing I want to here about is that "we are on a road to unstainable debt" which is hogwash. It seems that MR might be a little more concerned about inflation and trade deficits too. A major selling point for me of MMT is that it is so provocative in claiming that trade deficits don't matter.

     I don't like the idea that producers are even more important than consumers-this seems to me to be the back door to favoring supply side fiscal policies.

     Still, Cullen remains one of the best expositors of the overall all theory. He is right that the important thing about MMT is its descriptive rather than prescriptive aspects-though let's face it as much as I am interested in economics if there were no prescriptive implications it would not be a subject of such immense interest.

      In any case we'll see where the Great Schism of MMT goes-if it will be on the line of Martin Luther...

Politifacts: Obama is 75% Right

      It's kind of funny really. Obama made two claims that the SOTU speech,

      "In the last 22 months, businesses have created more than three million jobs. Last year, they created the most jobs since 2005."

       So Poitifacts looked it up and determined that: in the last 22 months-which of course is the bulk of Obama's term- businesses have created more than three million jobs and that last year they created the most since 2005.

       The declare him half right though both-not just 1 out of 2-of his facts were actually accurate-that is to say facts.

      So Jared Bernstein calls them on it-what did he say that wasn't true. Their answer was he implied that he deserves credit for it. In reality he hadn't but the question begs is what if he did?After all we know these jobs have been created, the reason for the job creation is a matter of speculation. I can explain it however I might like and you can't really accuse me of making a factual error though I may be right or not.

    Really the reason for it at this point is beyond the realm of simple facts. Ironically Politifacts moves beyond the realm of just the facts ma'am itself by implicitly stating that the jobs were not due to Obama's policies. I mean that clearly assumes facts not in evidence.

     Now Politifacts has split the difference and declared what he said 75% true. Why is this? Krugman thinks it's because it might help the Democrats. I don't know that it's that so much as that Politifacts is eager to maintain it's "nonpartisan" tag. However as Krugman observes facts have a clear Keynesian/liberal bias.

Wednesday, January 25, 2012

The US vs. Europe: Europe is the Much Bigger Basket Case

      When I asked 4 months who was the bigger case maybe it wasn't as clear. However it is becoming clearer and clearer that Europe is by far the bigger basket case. Another important point: the US does not stand the same risk of Japanese stagnation.

       The answer to the question of whether we will go the way of Japan is: no. And the answer to who is the bigger basket case is Europe.

      The reason Europe is in such worse shape is twofold. The first reason is the monetary structure of the EU is a mess with no lender of last resort. This is what there is no debt crisis in the US, Britain, or Japan but only in the Euro countries.

      However the second reason is also the reason we won't go the way of Japan. Unlike Japan or Europe we have these advantages: a growing population that is also highly heterogeneous. Then of course the US has the advantage it always has had since the start of this country of having such a big, vast country with so many national resources.

      When you figure out what went wrong with Japan, part of it is the population is shrinking. During it's boom years of the 70s to the early 90s Japan had significant population growth. Since then they have been shrinking. In Europe anti immigration bigotry takes away the one way this dangerous population contraction could be reversed or at least mitigated.

       Yet France that likes to fancy itself a "cradle of democracy" has taken the extreme step of discriminating against Muslim women.

Out of the Euro: How Smart are the British?

      Unfortunately, not nearly as much as you might at first glance credit them. To be sure by not being on the Euro they have avoided Krugman's Rubicon Effect-the effect of lacking your own currency and printing press.

      Still, Britain under David Cameron has subjected itself to Euro style austerity while not having a Euro style debt crisis. In reality despite what the austerity hawks tell us what determines whether or not you have a debt crisis is not whether you are "thrifty" or "spendthrift" but rather whether you have your own printing press.

      Nevertheless perhaps Britain deserves credit for having dodged a bullet and not being part of the Euro in the first place.

      This seems plausible. However, after reading a bit of the historical record in Correlli Barnett's "The Lost Victory: British Dreams, British Realities 1945-50" Britain's abstention from the EU gets some historical context and doesn't look very impressive. Certainly Britain's historical isolation from the EU was not due to superior, piercing insight but to the contrary out of being out maneuvered and overall having the wrong priorities.

      As Barnett shows, British dreams at the end of WWII were largely a prisoner of the past glory of the British empire and also the illusion of being on the side of the "winners" in WWII. In reality of course, as Barnett says, Britain had to be bailed out and carried home by the U.S.

      The trouble was this. The British still wanted and thought they were a "big power" but in reality had long since become a second rate power. This development was already clear at the start of the early 20th century but it was undeniable after the end of WWI.

        While Churchill is remembered-rightly overall-for being the hero of Britain-certainly he was the right man at the right time following the disastrous appeasement policy of Neville Chamberlain-in reality Churchill's strategy during WWII retarded progress and needlessly prolonged the war. The reason for this was largely two fold-he had the British anxiety to avoid the 700,000 causalities they had suffered in WWI, and because they wanted to protect the British empire-India, Egypt, it's other colonies and commonwealths.

        After WWII with British pretensions at their zenith-after all they were on the side of winners, they were a "great power"-this was never a concern during the era when the British truly were the world leader in the 19th century, but now that they were a second rate power they now were concerned with prestige-they were more concerned with maintaining the British commonwealth of nations and their "special relationship" with the US-this special relationship was and has since been a lot more special for the British than the US of course-and they weren't sure about the European Project thinking it might take away from these priorities.

        Recently of course Cameron was left out in the cold after attempting to impose a list of demands before the EU went forward with some moves towards further integration.

        Cameron was ignored and Sarkozy basically told him he could mind his own business. It was worried after this that Britain had suffered a bad political loss by this thumbing of the nose at Cameron.

         Yet this has been the relationship of Britain with the EU since the earliest days of the European Project. As Barnett shows us, in 1950 when the Europeans put forward their Schuman Plan, the British tried to come up with their own diluted  plan,

         "The French, however, had preempted such British attempts at sabotage with the speed and ruthlessness of a Gallic driver overtaking and cutting up a car-load of British tourists trundling obstructively in the middle of the road. Before Schuman even first informed the British Government of his plan on 10 May 1950 he had secretly obtained American and German support for it. Dean Acheson, the US Secretary of State, being strongly in favor of European integration and also bored and irritated by British pretensions to share-as between two world powers-a 'special relationship' with the United States, enthusiastically backed the Schuman plan."

          The Germans of course also jumped in to jump in to be co-founders with the French of a new authority. Britain just as they were recently with Cameron were left outside. Britain would be on the outside looking in with the construction of the new postwar Europe.

         It's easy to lose perspective about the EU. This idea was formed with the objective in mind of making sure there was never another European world war again. The current problems are about the monetary structure of the Euro system started in 1998. This needs a lot of work. Clearly the EU needs either less or more union.

For Mareket Monetarists Money is the Root of All Evil

       This is what emerges in the post by Lars Christenen I linked to yesterday.

        The idea of money illusion-of course the name of Sumner's blog-is that if it weren't for the illusion of money the economy would work like a barter economy.

        This is very interesting. Here they are, arch apologists of totally unfettered capitalism-libertarianism-and yet they believe that the ideal economy is a barter economy.

        It's kind of like the old Catholic church that loves children but hates how they are created. The MMers are also like the  What I also find interesting is to imagine a debate between the Market Monetarists and the Modern Monetary Theory people.
        To put up what the MMers say about money against what the MMTers say. MMT claims that since Nixon closed the gold window in 1971 our fiat money currency of today is a government monopoly money.

        Yet in a way maybe the MMers know this which is why they are so opposed to money. Understand, in the mind of Sumner and Christensen NGDP targeting is meant to take away what they believe are the distortions of having money in the economy.

        So that's original sin Market Monetarist style-obviously not only for them; it's true for "regular monetarists" too indeed you could argue that it's true for all Right wing economics-libertarianism.

        Yet like all versions of The Fall of Man the question begs: What Caused Sin? With a morally just, benevolent God how is it possible?

         And so if money is the root of all evil, why do we have it at all? Who or what could have created such a nefarious substance. Is there any way we can ever free ourselves of the Circe? The answer of Sumner, Chrisensen and the rest of the MMers is yes: NGDP targeting.


Sumner and Awesome Obfuscation

       The debate over fiscal stimulus-whether it works or not has taken more and more strange turns. David Glasner who I even thought was right in his criticisms of his fellow market monetarist predictably concluded the interminable discussion-interminable thanks to Scott-by declaring,

        "Note that I didn’t need to say anything about accounting identities to get to this result.  (Gotta find that silver lining somewhere.)  But Scott can still feel good about having convinced me that his basic intuition was right.  The should teach us all to remember the old maxim, “Don’t Mess with Scott.”

        Sumner was a good winner-he won as far as Glasner is won over and Noah Smith and effusively declared that,

        "Noah Smith is of course the highly respected Keynesian blogger that Paul Krugman linked to as an expert on the issue of misinterpreting identities.  Who says I always disagree with Paul Krugman."

        I wouldnt' be too impressed by this praise, it's just a case of Sumner's considerable ability for concern trolling. After all it's easy to praise and flatter the "Keyneisan blogger" now that Smith declared that Scott was right or at least had made no error of accounting identity vs. behavioral phenomena and that Wren-Lewis did make some error.

        Meanwhile after all this quibbling-the whole thing was about Sumner taking it personally that Simon Wren-Lewis allegedly treated Lucas and Cochrane so shabby, Cochrane came out with a post today that seems to be an admission that stimulus is needed-deficit spending-as long as we don't call it stimulus. If we do that will somehow have some ill effects.

       We need something that we think of as stimulus but that Cochrane calls something else and as much as we need it and it will be bad if we don't have it worse still apparently is if we do have it but call it by an imprecise term.

       This is what these debates amount to. So now Cochrane approves of stimulus as long as you don't call it stimulus. However he spends the second half of his post complaining about as Noah Smith puts it that Krugman and Delong are "big meanies." He provides example after example.

        I put the words Sumner, awesome, obfuscation as that seems where this entire tremendous digression over Simon Wren-Lewis allegedly using a bad argument-consumption smoothing-to make an argument that Sumner says is reasonable.

        So what does this all amount to? Not much. I maintain that to understand Sumner you have to recognize his capacity for concern trolling. That's how he's able to seduce some liberals. If he came out like Money Illusion's resident Right wing nut Morgan Warstler his readership would be a heck of a lot smaller. But Warstler has told me that he believes that he and Scott are of one accord in their aims and maybe Scott is simply much better in presentation.

       If you want to get the endgame of this whole market monetarist phenomenon I say put down Scott Sumner and check out Lars Christensen. His post is called simply Market Monetarist, and indeed the very name of market monetarism is actually his coinage rather than Scott.

      During the interminable tangent-a rather amusing three ring circus that Sumner led-Lars wrote a post called "There is no such thing as fiscal policy." This is a pretty radical attack on fiscal policy. From Cochrane claiming that fiscal policy can't work-till his bout face today-and Sumner saying it can never be as effective as monetary policy in reviving demand-we have Lars claiming it simply doesn't exist.

     Whoa! I guess if it doesn't even exist we can't use it. Ever. It's another postmodernist mind fuck evidently. What are Cochrane and Christensen going to say to each other now? I will suggest that if you want to make any sense of market monetarism read Lars. You get it much more concisely and to the point if nothing else.

      Now here is his point. In a barter economy, he tells us, there can be no fiscal stimulus. Why is this? Because, "As there is no money we can not talk about sticky prices and wages. In a barter economy you have to produce to consume. Hence, there is no such thing as recessions in a barter economy and hence no excess capacity and no unemployment. Therefore there is no need for Keynesian style fiscal policy to “boost” demand."

       Fiscal policy can redistribute income but not effect demand.

       "in a barter economy fiscal policy is a purely redistributional exercise, but it will have no impact on “aggregate demand"

        Ok but maybe the title of this post is wrong. It shouldn't say there is no such thing as fiscal policy just fiscal stimulus.

         The reason we believe that fiscal policy can impact demand is because of money illusion.

         "for fiscal policy to influence aggregate demand we need to introduce money and sticky prices and wages in our model. This in my view demonstrates the first problem with the Keynesian thinking about fiscal policy. Keynesians do often not realise that money is completely key to how they make fiscal policy have an impact on aggregate demand."

          What NGDP targeting is meant to do is to take away money illusion by taking away this misleading effect of the velocity of money.

            "Under NGDP level targeting M*V will be fixed or grow at a fixed rate. That means that we is basically back in the Arrow-Debreu world and any increase in G must lead to a similar drop in D as M*V is fixed."

            The goal of NGDP targeting therefore as Sumner, Lars, David Glasner, et al, conceive it is a return to in effect a barter economy. Money is therefore for them kind of like the root of all evil or at least original sin. Like for old fashioned philosophers appearance was the veil that led us to misapprehend true existence, so for the market monetarists, money is the veil that makes us misapprehend the truth of the economy.

           Yet Lars does admit that fiscal stimulus can work or seem to work due the the Circe of money.
           "lets say that the central bank is just an agent for the government and that any increase in G is fully funded by an increase in the money supply (M). Then an increase in G will lead to a similar increase in nominal income M*V. With this monetary policy reaction function “fiscal policy” is highly efficient. There is, however, just one problem. This is not really fiscal policy as the increase in nominal GDP is caused by the increase in M. The impact on nominal income would have been exactly the same if M had been increased and G had been kept constant – then the entire adjustment on the right hand side of (3) would then just have increased D."

          Yeah let's say that. Actually I think this accurately describes the actual historical record of the Fed between the time of Marriner Eccles and the 1970 when Milton Friedman started whispering sweet nothings in Nixon's ear.

           To be sure Christensen claims that this effect is still misleading as it's the printed money-monetary policy-that does the real heavy lifting. It would have been exactly the same had the supply of money been increased and government spending been kept constant.

            In a way these claims by Lars actually straddles the line with MMTers who do actually argue that it makes no difference whether the Fed or Treasury prints the money but where they go from here is obviously more or less diametrically opposed to what the MMers do with it. The Market Monetarists vs. The Modern Monetary Theorists... Talk about a battle royale.

           Again though Lars should call this "There is no such thing as fiscal stimulus." It seems to me though that even if you believe that fiscal stimulus is a fiction it may nevertheless have proved to be as the belief in God once was.

           For what's curious is during the time we believed fiscal stimulus we had the Keynesian era. Since we gave it up we have had an anti-Keynesian era. During this anti-K ear we have seen the wages of median Americans stagnate. Is this all coincidence? What do you think?

           In any case Sumner's oft repeated argument that the fiscal multiplier is roughly zero because any fiscal stimulus will be followed by monetary tightening according to Lards depends on the policy of the Fed. It wasn't true during the Keynesian ear. However in this anti inflation era, post Volcker and of the Taylor Rule-the much lauded Great Moderation-it is true of how the Fed has in fact acted. This doesn't prove that fiscal stimulus doesn't work but rather the Fed is off the rails and probably could use the kind of reforms Barney Frank wanted for it. Namely not ending the Fed as Ron Paul says but rather ending its "independence."



Tuesday, January 24, 2012

President Obama Nails State of the Union Speech

      Two things I really liked off the bat is one his taking on the filibuster with the idea of maybe eliminating it for Supreme Court nominees.

       The other thing I really liked was that the effective tax rate for the wealthy should be 30%. Of course I don't get how that fits in with the proposals that have been made by Simpson-Bowles, et al. which he has at least at times seemed to sign off on that calls for lowering the taxes both on corporations and the top rate into the 20s.

        Even if you get away with every single "loophole" known to man for the rich I still don't see how you lower the tax rate from 35% to 26 and somehow it will give you an effective 30% rate because you have eliminated loopholes.

        But the thought is right and it gives Americans-who want the rich to pay higher taxes; including in this group is even the richest Americans, Buffett and Gates-incidentally I was watching a little about Gates tonight, it's amazing how much good he has done in the world over the last 13 years or so.

        I don't care if he has become such a philanthropist to counter the negative public image he had at the time of the anti trust suit in the late 90s. If he has whipped some chronic problems in India, it makes no difference to the Indian people who have benefited what his initial motivation was.

       Of course there is no way for Obama to raise taxes on the rich-unless the political groundswell became irresistible perhaps. But Americans clearly can see that only the election of Democrats in November gives them any chance of seeing their wishes carried out.

       What strikes me is that to have an effective 30% rate on the wealthy it can be achieved in one of two ways. Either raising the nominal rate of 35% considerably or eliminating every loophole in the world for the rich. Historically it seems that effective tax rate for the wealthy is almost exactly one half of the nominal tax rate. Which in that even would call for a 60% rate.

       If it can be achieved at a lower rate you then would have to close all loopholes for real. One thing that could be done to do a lot to move the needle would be to simply tax dividends and capital gains at the same rate as income.

       Really that would do a lot towards satisfying the Buffett Rule.

Sometimes Good Things Do Happen to Nice People

     With apologies right off the bat, I am being presumptuous enough to call myself a nice person though I don't think that's untrue.

      In any case this post is about something good that happened to me. It's a bit of a digression from the main event-which is calling out Scott Sumner and other Right wing hacks; you know like Robert Lucas-who used to giggle at "Keynesian talk" in class back in 1980-and John Cochrane.

      There is also the incredible NY Giants of 2011 so much like 2007, who says lightning can't strike twice? But this post is personal-I get personal some times. Something good happened to me this morning.

       It shows that what seems unthinkable often turns out to be very thinkable and possible. Last week I also got personal and told you guys I finally have a new job. I always think it's important to get personal about that because when I write about these subjects in economics and politics while they interest me, they are also personal to me.

      I know first had that times are tough. I have been unemployed or underemployed since 2008. I have a Bachelors degree in accounting and am close to a Masters so it's not a question of education. Indeed I've gone to job fairs where people with advanced degrees are reduced to the level where they'll take any job they can get no matter how "demeaning." For more on my new job please see

      My job is as a security guard. The only real down side to it is it pays nothing-$8 hr. As that's more than the minimum wage maybe Sumner wont hold it against me as they are "willing to pay" me more than this minimum that he thinks is retarding a recovery.

      It's not a bad gig besides that-though obviously that is the main thing-I basically sit in a nice gate house-at a gated community-and buzz people in. I have to work tonight but am visiting my friend today so I figured rather than bring changing clothes I would just wear the uniform all day.

     This morning an attractive woman with some kind of nice accent-I believe Hispanic; I like Hispanic women-asked me some questions about the bus. Then she started asking me about myself-was I married, where do I work, etc.

      When I told her I'm not married and have no kids she said "Don't worry, you will be soon." I took that to be a pretty good hint so I suggested that we exchange numbers.

      A few things that strike me. I don't know Maggie's story or what will be to each other. Hopefully if nothing else a friend-I never expect anything more than that starting out, I let what develops develop but never plan beyond that; like the football players tell us, it's all about "staying within yourself."

     But it's funny cause often people say that you have to "put yourself out there" you can't expect a pretty woman to just come to you and ask you out. Yet clearly sometimes that does happen...

     I wonder how much my uniform helped-"the man in uniform" thing is a keeper. Maybe I should wear it more often. LOL.

     Doesn't it really seem like telling a prospective woman about yourself is like telling a prospective employer? She asked me where I live, where I work, if I'm married, if I have kids. She thinks practically. I'm not blaming her probably that's how most smart women do think, and I agree they should do so.

    Anyways here's to a world of possibilities.