Friday, January 31, 2014

Sumner Mocks Ed Prescott

     I think this is interesting as it gets at what his appeal is I suspect for many. Like Tom Brown for example. Not to pick on my good friend and Diary reader but I'd say that his attitude is something Sumner no doubt would welcome. He believes Scott clearly and doesn't buy my skepticism.

     "Also, I'm going to say that it's quite possible to be a liberal MMist: you could be all for more gov involvement in things and still think that monetary policy using NGDPLT trumps fiscal policy every time for the purpose of avoiding unnecessary recessions or depressions (caused by shocks)."

    I think the kind of comment he writes here explains a big part of it. 

    "Edward Prescott played a pivotal role in developing real business cycle theory in the late 1970s and early 1980s.  Prescott claimed that monetary shocks did not have significant effects on real output.  At about the same time both monetarist and Keynesian economists were arguing that if the Fed brought the rate of inflation down rapidly, unemployment would soar much higher in the short run.  The monetarists claimed unemployment would later fall back to the natural rate, even if inflation stayed low.  The Keynesians were less sure about that."

  "In 1981-82 the Volcker Fed did bring inflation down very sharply, and unemployment soared to 10.8%, the highest rate since 1940.  How did this event affect Prescott’s views?  This is from the same NYT column:

Edward C. Prescott, who won the Nobel in economic science in 2004 and is on the Minneapolis Fed’s research staff, said Mr. Kocherlakota was misjudging the Fed’s abilities. “It is an established scientific fact that monetary policy has had virtually no effect on output and employment in the U.S. since the formation of the Fed,” Professor Prescott, also on the faculty of Arizona State University, wrote in an email. Bond buying, he wrote, “is as effective in bringing prosperity as rain dancing is in bringing rain.”

     "Well that settles it."

      I see this kind of thing as a brilliant flourish by Sumner who gets credit among the Mushy Middle types for knocking both sides. Yes he gives Krugman and the Keynesians hell but he calls out a RBCer like Prescott as well so he's therefore a straight shooter and an honest broker. What I think it really does though is disguise his real position and his real objectives. It makes it seem that there's a lot more daylight between Sumner and Prescott than there really is. 

    Sumner would no doubt scoff that he's for NGDPLT futures and believes in the great power of the central bank to give the economy any level of AD it needs whereas Prescott denies monetary policy has any power at all. 

   Yet, I think that in truth Prescott and Sumner are very close. The seemingly wide differences over monetary policy is more about a difference in means than a difference in means. At the end of the day both men want one thing more than anything: to shrink the size of government. Everything else is window dressing. 

    Or consider what Stephen Williamson said about Prescott and what would have been his relationship to Milton Friedman if the latter were still alive today:

      "Friedman was of course a big advocate of laissez-faire, but not in monetary arrangements - he thought the government should be the monopoly supplier of currency, and that the central bank had an important role to play. We may now consider some of his monetary policy prescriptions wrongheaded, but if Friedman were alive and were Prescott's colleague, he would be giving him a hard time over lunch."

       However, the important point is that they'd be eating lunch together-would they eat lunch with Krugman or Delong? This is what intimate friends do not adversaries. In fact Friedman and Prescott differ not a wit with respect to ends-both wanted to shrink the size of government. So they had the same end but argued about the means. So to with Hayek and Friedman who were close friends and both frequent visitors of both the Reagan White House and Margaret Thatcher over at Downey Street. 

       So they agreed in politics no matter what their apparent fissures on economics. Freidman and Hayek were also good friends. Question: which is the authentic conservative position-Austrainism, RBC, or Monetarism? Answer is they all are. These rival Right wing schools only seem to be in conflict. In point of fact they're complimentary. Put it this way. Do you have a better chance winning a race of 10 horses with 1 horse in the race or 4? Whether Austrianism RBC, or Monetarism win it's the same result: a shrinking in the size of govt. 

        For folks like Tom Brown,-basically a nice Centrist guy, who's not political- Market Monetarism may seem very remote for Austrianism or RBC. In a sense I guess you could argue that Monetarism is the extreme Left of conservative economics. However, this is only true with regard to means not ends. 

       This point is brought home in reading Tom Sargent in his Rational Expectations and Inflation.'   In chapter 2 he's apparently pretty critical of the Reagan regime as he argues that the monetary and fiscal policy of the Reagan White House was in conflict-it was a present issue at the time as he wrote in the mid 80s. We had monetary tightening and deep fiscal deficits thanks to the Reagan tax cuts-he doesn't mention the huge military buildup here. 

     In this, Sargent-the Right wing New Classical economist-seems to be critical of the Right wing Reagan Administration. Yet it''s not that straight forward. 

      Sargent talks about different fiscal regimes. There's a Ricardian regime that believes that fiscal deficits can't be inflationary because the assumption is that the monetary authority will monetize none of the deficit and the fiscal authority won''t borrow more public debt in the future but will at some point raise taxes to pay for 100% of the deficit.

        Another fiscal regime is a Milton Friedman regime-Friedman proposed this back in 1949 where fiscal deficits are always fully monetized so that whatever the fiscal deficit, the Fed prints money to fully monetize the deficit-which Sargent calls an inflation tax. 

       There is a kind of intermediate regime that thinks with a deficit the Fed will probably partially monetize it, the govt will only partly raise taxes.  In any case, Sargent seems to be critical of Reaganism's mix of tight monetary policy with deep deficit spending. However, he then suggests an alternative theory where there are three players. The spending authorities, the taxing authorities, and the monetary authorities. 

        In this case, the taxing and monetary authorities are in collusion against the spending authorities with the aim of cutting govt. spending.If you adjust this to say not 'spending' but 'nonmiliaary domestic discretionary spending' then I'd say this interpretation is dead on. 

     Prescott nominally claims to not be comfortable with this out of concern that this will lead to uncertainties for the market with such enigmatic monetary and fiscal arrangements. Still, at the end of the day, he shares the common Right wing aim of shrinking the size of govt. So I maintain that the difference is about means not ends. And having different theories about means out there gives the Right more horses in the race. You could say if you were a Right wing strategist who wants to see the size of govt shrink over time it'd be in your interest to have all these various Right wing theories in the 'marketplace of ideas.'

        After all, this is what Mt. Pelerin basically was-and is where Neoliberalism was hatched. 

     P.S. In discussing Raicardian Equivalence we're of course reminded of Cochrane's talk of 'shlock economics' back in 2009 and how the fiscal stimulus wouldn't work thanks to full RE. However, to believe in the Ricardian fiscal regime means that fiscal policy can't be inflationary so why was he and Lucas also concerned about inflation?

Thursday, January 30, 2014

A Little Movement by House GOP on Immigration; Stark Division on 11 Million Undocumented Workers

      Yesterday Greg Sargent suggested the House GOP does want a deal.

      "The politics of immigration inside the House GOP caucus can seem perplexing and opaque. Fortunately, Paul Ryan just gave an interview to Chuck Todd that pulls back the curtain and reveals how Republicans see the political minefield that lies between them and getting to Yes."

     "The good news: Ryan’s interview reveals a real desire to figure out a way to get to a deal. The bad news: Republicans are still far from crossing bridges that will be necessary if compromise is ever going to happen."
     A major bridge is the question of the 11 million undocumented immigrants. Unfortunately, the GOP still feels that these folks must be in some sense punished. Allowing them too easy path to citizenship supposedly somehow robs those who went through the legal channels in getting here. What's never asked is whether the same channels are really open to everyone.
    Today the House GOP released a document that shows that they indeed to realize they need to make a deal. However, while they are willing to allow undocumented immigrants who came here as children gain citizenship-meeting certain criteria-those who came as adults must not somehow 'benefit from breaking the law.'

    "Under the leadership's proposal, undocumented immigrants brought to the country as children will be eligible for eventual citizenship. But those who came as adults won't be promised any such thing, although the proposal does not preclude them from seeking permanent residency and ultimately citizenship through the regular channels."

   "There will be no special path to citizenship for individuals who broke our nation’s immigration laws -- that would be unfair to those immigrants who have played by the rules and harmful to promoting the rule of law," reads the document. "Rather, these persons could live legally and without fear in the U.S., but only if they were willing to admit their culpability, pass rigorous background checks, pay significant fines and back taxes, develop proficiency in English and American civics, and be able to support themselves and their families (without access to public benefits)."

     One thing these 'principles' amount to is that only undocumented workers with pretty good jobs, who don't need any kind of public benefits-presumably this includes things like food stamps, TANF benefits, and UI-and who have lots of money to pay all these fines and back taxes-while many Americans owe plenty of back taxes and aren't targeted. Yet how does an undocumented worker obtain such high paying employment?

    It's a start as Chuck Shumer suggests.

     However, there's still a lot of 'bridges to cross' as Sargent puts it-of course these days bridges make you think of nothing so much as Chris Christie.

    Sargent does think the possibility of a compromise is here. Obama suggested in his SOTU speech on Tuesday that he's open to the GOP's 'piecemeal' approach-ie, slow and leisurely while millions suffer-as long as the central issues are tackled-a major one being the 11 million. 

    "The final important thing Ryan says concerns citizenship. Ryan repeats there will be “no special pathway.” But this does not preclude the undocumented getting citizenshipeventually. Ryan says these folks will simply have to get to the “back of the line” for a green card — leading to citizenship. As the New Democrat Network’s Simon Rosenberg puts it: “The House Republicans are talking about a path to legalization, but this does not contemplate a permanent second class status.”

    "It is here where the possibility for a deal lies. If you grant legalization to the 11 million, and clear out some of the legal channels to citizenship that now exist, you could see Dems accepting this deal under certain conditions. That would be a big concession by Dems, who want citizenship up front. But it is hard to see Dems accepting it if Republicans also won’t grant legalization up front under reasonable conditions, for the reasons explained above. We just don’t know if they will get to this point. But they are groping towards it."
     Again, there's really no reason for this worry about the 11 million somehow 'cutting the line' of legal immigrants. I don't believe these legal immigrants are the real concern but rather the sensibility that somehow the undocumenteds must be punished, they haven't suffered enough already apparently. The reason for it is a punitive desire to punish 'those people.' 
    If it's the beginning of a deal-great. I think it might be, it's just unfortunate that we have to as always in negotiations with this miserable GOP House have to take the scenic route. 

Some Irony on the New Jersey Ethics Commission

     Guess who's been tapped to head the new commission? A long time Chris Christie insider who served with all nine of the Christy aides now under subpoena with the legislature.

     Meanwhile former NYC Mayor Rudolph Giuliani continues to defend Christie and is offended that some of what he said in a radio interview is being read as it he doubts Christie's claim that he knew nothing of the political nature of the GWB lane closings until January 9. Still, it's not so unreasonable that this statement was 'misread.'

    "Giuliani, one of Christie’s most vocal GOP supporters, had seemed to suggest in a radio interview that there was a “50-50” chance that Christie knew ahead of time about the bridge lane closures that one of his aides helped orchestrate in an apparent act of political retribution. Christie has adamantly denied advance knowledge of the traffic scheme."

Giuliani was asked on Geraldo Rivera’s 77 WABC radio program whether an email in August from Christie’s then-deputy chief of staff, Bridget Kelly, about “traffic problems in Fort Lee” implied that earlier discussions with the governor had taken place about the lane closures in the northern New Jersey town.
The question came during a discussion on the radio program, aired Thursday, about a recent New York Times story detailing Christie’s political operation."

   "With the governor?” Giuliani said on the radio. “No, it doesn’t. I mean, no, it’s 50-50. I mean, it leaves you with no possible way of knowing: Did she discuss it with him or didn’t she discuss it with him?”
In an interview later Thursday, Giuliani said his “50-50” comment was taken out of context. The “it” he was referring to in his 50-50 remark, Giuliani said, was the Times piece"

    Read more:

    Ok, that clears it all up-right?

    Giuliani said he was “offended” that his remark was being held up as evidence he had doubts about Christie’s veracity. The former New York mayor noted that he went on to praise and defend Christie on the show, making clear that in any government, there is some small percentage of things that go on that the chief executive is simply unaware of.
     “He’d assume they’re doing the right thing,” Giuliani said earlier in the radio interview about Christie’s approach to managing his aides. “It doesn’t make sense to me that they would necessarily share this with him.”

     "Giuliani reiterated his support for Christie, whom he called “a good friend” who “is being unfairly treated.”

   "I don't know. Saying 'it doesn't make sense that they would necessarily share it with him' doesn't 'necessarily' take away the ambiguity or so it seems to me. Come to think of it, his previous defense of Christie was rather questionable as well. It was the bully defense-surely he would not have bullied reporters asking him about Bridgegate if he realized the stories were actually true. As Giuliani is himself something of a bully, maybe it's understandable he it makes sense to him."

      However, it still seems to have something missing: 'I'm clearly telling the truth for why else would I be so arrogant?'

Tuesday, January 28, 2014

Sorry, Obama is No George W. Bush

     We keep hearing how the President is in a 'malaise' and that he's even entered 'George W. Bush terrirtory. ' Of course, the observation is always made by people like Joe Scarborough and it sounds more like wishful thinking than anything.


     Here though I think Krugman has a good answer to all this kvetching.

     "Something I wanted to say, but didn't get a chance. There's all this stuff about whether Obama's a lame duck, about whether he still has a chance to b ea transformational President."

      "Hey, in a fundamental sense he's been a lame duck since November, 2010, faced with scorched earth opposition to anything he proposes. But he's also, and already a transformational President. Health reform is the law and it's rapidly becoming irreversible.(At this point it looks as if there will be around a million fewer signups by end-March than projected-6 million instead of 7 million. That's really not too bad. Financial reform has been better and stronger than expected. Effective tax rates at the top have retraced a lot of ground."

    "Basically by winning 2012, Obama solidified his legacy. Everything else is maneuvering for fairly small stakes."

   UPDATE: Later we discover that the White House is declaring that 9 million will be signed up by the end of March-if so that will blow the goal out of the water and truly be shocking

Obama's SOTU Line of the Night: 40 Healthcare Repeal Votes Enough

     The President gave a great speech tonight and as much as anything it was the optics of the speech that hit home. The President came across as upbeat and positive-but not stupid. Yes, he called on the Congress to act-but gets that it probably won't and for that reason he has a 'phone and a pen


     The best line of the night was where he said 'Yeah, I get it, you Republicans don't like Obamacare. However, 40 repeal votes are enough. If you have any constructive ways to improve it-bringing down the cost or increasing service let's hear it. However, we need to stop wasting the American people's time.'

    Josh Marshall agrees that there was more bounce in the President's step than you might have imagined.
     "mentioned during the speech that the President seemed to have a bit more jump in his step than I expected, perhaps more than the dented poll numbers and sense of malaise hanging over the White House would suggest."

      I think the whole 'malaise' thing has been overdone. I hear more wishful thinking than reality when folks like Joe Scarborough insist that the President is entering the 'George W. Bush phase of his presidency.'

      The President still isn't nearly as unpopular as Bush was in his second term. The lowest his numbers have gotten is the low 40s-not 26%. Obama isn't held in the hostile regard that Bush was-and still is judging that no Republican till this day will be pictured with him. There's understandable frustration that the President hasn't been able to advance more of his agenda but that's the fault of the GOP Congress.      

     Talking Points Memo also listed 4 significant executive orders Obama will do this year.

     Raising the MW paid to employees of federal contractors is huge and may in time raise the effective MW forcing Congress to raise the official rate. That pizza executive Obama mentioned that has already started paying his workers a MW of $10 is a the kind of story we may see more of.

     Overall it was a strong, uplifting speech and makes me proud that he's our President-as he always does. It's tough for anyone to feel pride of the GOP these days and they just underscored that tonight with their 3 different speeches. Even the Tea Party can't agree with itself needing two speakers. The sooner we get this reactionary cabal out of the House the quicker the people's agenda can be advanced. As long as they're there it's absurd to blame the President for much.

    It was also clearly an anti Reagan speech. Obama made the point that Reaganomics failed particularly starkly when he pointed out that the MW is now 20% less than when Reagan entered office.


Kim Guadagano Also Bullied Artist on New Jersey Arts Council

     Paul Krugman is going to be on CNN tonight-both before and after President Obama's SOTU address-which should be a good one. Happy to hear the President is finally getting that it's legitimate to use the executive order and that he indeed does have a 'pen and a phone.'

      Krugman again mentioned the actions of Chris Christie's Lieutenant Governor who it's turning out didn't only bully Hoboken's Mayor, Dawn Zimmer.

      "Last week I mentioned local news reports about the bizarre and vicious smear campaign Kim Guadagno, Chris Christie’s lieutenant governor, waged against an artist involved with the New Jersey Arts Council. Today the story is in the Times. Ms. Guadagno sure seems like a real piece of work — as do several other close associates of governor yells-at-people."

       "This might suggest something."
      It certainly does. It shoes a pattern with her-she indeed is a 'piece of work.' Not only her either. We have other patterns. Like in Fort Lee we also have a development project linked to state pension funds. 
     "One of the companies involved in a billion-dollar development in Fort Lee, N.J. secured state pension funds as part of the financing of the project, PolitickerNJ reported on Tuesday."
     "Documents obtained by the PolitickerNJ show that the State of New Jersey Common Pension Fund E holds a majority 55 percent ownership interest in the Tucker Development and Acquisition Fund, L.P. The rest of the entity is divvied up between Metropolitan Life Insurance Company (a 27.5 percent ownership interest), Prudential Insurance Companies of America (a 16.5 percent ownership interest), and Tucker Managers, LLC (a one percent ownership interest.) The document was officially recorded by the Bergen County, N.J. county clerk on May 16, 2012."

      "The Tucker Development Corporation is one of the companies behind the Hudson Lights project, which is being built on the western eight-acre portion of a 16-acre redevelopment area in Fort Lee, located beside the entrance to the George Washington Bridge. The proximity of the project to the bridge has led to speculation that the bridge lane closures that occurred in September -- and that this month have exploded into a political scandal for Gov. Chris Christie (R) -- were somehow connected to the project. But no link has yet been publicly demonstrated."

     "On Sept. 16, Tucker Development Corporation announced that it had secured $218 million in financing for the Hudson Lights project. In a press release, the company described the project as a joint partnership between "affiliates of Tucker Development Corporation, Ares Management and Kushner Real Estate Group."

     So we not only have more developments linked to Fort Lee but another development project-in the Dawn Zimmer Hoboken scandal it was the Sandy funds being withheld unless a development project were accepted-who knows what the link is here exactly, though it's hard to believe there's none. However, we just keep getting more and more smoke. How long before the Governor's house catches fire?

Sunday, January 26, 2014

The Permanent Income Hypothesis and Why Mark Sadowski is a Typical Macroeconomist

     Not to pick on Mark-with whom I've buried the hatchet and I basically like. Also I don't think Tom Brown could take me having problems with Mark again. However, I did think of him here in a piece Richard Waldmann wrote about Milton Friedman's Permanent Income Hypothesis. 

     "To begin at the beginning, the Permanent Income Hypothesis is the conjecture that it is useful to model consumption savings choices by treating consumption at different times as consumption of different goods and imagining an agent who maximizes an inter-temporal utility function subject to an inter temporal budget constraint. I add that I think of it as including the assumption that it is useful to model aggregate consumption as the decisions of a representative consumer. The PIH as introduced by Friedman did not include the assumption that the consumer has rational expectations and thus did not imply that the resulting choices were optimal. However current usage of the phrase now implies, at least, that the assumption of rational expectations is a good approximation."

     "So far even with a representative consumer with rational expectations, there isn’t enough there to justify the word hypothesis. That is to say the assumptions have no implications at all without some further assumptions about the utility function. The key standard assumption which gives content to the PIH is that utility is the sum of pleasure from consumption and a function of everything else we care about (that the utility function is additively separable in consumption and everything else). This is a very standard assumption in main stream macroeconomics. It is often relaxed if the aim is to test the PIH and to avoid rejecting it (yes I am asserting that this research program starts from the conclusion). But, as far as I know, the assumption is almost always made and used when the PIH is used (rather than protected from the data)."

     "These assumptions are enough to get a falsifiable hypothesis as is demonstrated by the fact that the PIH with separability is rejected by the data. Predictable changes in income should not be associated with changes in consumption and they are. The typical macroeconomist’s reaction (as always) is to shrug his or her shoulders and say that models are false by definition and the Permanent Income Model (PIM) is useful, because it captures some aspects of the data, that is provides explanations for some otherwise puzzling patterns."

   - See more at:

     I'm thinking about the part about the reaction of 'they typical macroeconomist shrugging their shoulders and saying all models are false anyway what matters is how useful they are.' I seem to remember Mark making this argument somewhere-I don't have the quote though if I had to I could probably dig it up. I think it was regarding Granger Causality showing that the increase in the monetary base since 2008 has helped the recovery. 

     Waldman's post-which is not about Mark Sadowski-is very interesting as it looks at the PIH and he's very skeptical. The PIH is just one of those things that you almost feel like you're spitting into the wind regarding it as while we can certainly argue whether it's true or not-or whether for that matter it's useful or not-it's hard not to wonder if it will make any difference at all at least in terms of how mainstream Macro is done. The real story is not whether it's true or not-I think a strong case can be made it's netierh true or useful-but that Macro believes it true and its hard to see what might pry this from it's cold dead hands. Just like its hard to see what would pry say Rational Expectations, DSGE or the need for microfoundations-the Lucas Critique-or Long Run Monetary Neutrality from its cold dead hands. 

     To speak of 'typical macroeconomists' of which Sadowski evidently is-but I for one aren't, which is why Sumner thinks I have no right to an opinon on economic issues at all-is to speak of soemone who believes in all these things as much as they believe the sun will come up tomorrow or that 2+2=4. Indeed, this is not a bad place to evoke Sumner's hero Richard Rorty here who believed that even in supposed sciences-even 'hard sciences' rather than squishy social sciences like economics, no matter what it wants to believe-there is still a social consensus around 'truth' discourse and 'truth' statements. Rorty argued that social consensus is everything in any kind of truth discourse-he saw Winston's fate in 1984 as pretty much out of luck as there was nowhere for him to appeal against Orwellian society. 

    Nevertheless, I still am very untested in debates that do quest6ion these Macro verities. In his latest piece questioning PIH Waldmann appeals to what I consider a pretty impressive authority himself-Keynes in the General Theory. 

    "Keynes dismissed the PIH (well before it re-emerged) as follows when discussing consumption in Chapter 8 of The General Theory …
(6) Changes in expectations of the relation between the present and the future level of income. — We must catalogue this factor for the sake of formal completeness. But, whilst it may affect considerably a particular individual’s propensity to consume, it is likely to average out for the community as a whole. Moreover, it is a matter about which there is, as a rule, too much uncertainty for it to exert much influence.
    - See more at:

      This was a pretty stark position on PIH by Keynes-that whatever this means at the individual level, it averages out for the community as a whole and so doesn't matter for macroeconomics. In other words, it's not only untrue-as supposedly all models are-but it's not interesting either. 

      P.S. Not to be too graphic but I'm wiping my face off as the wind just blew my spit back into my face. 

      P.S.S The Rortian point is that while I or Waldmann or Warren Mosler, or maybe you the reader, may disagree with PIH, Rational Expectations, or Long Run Monetary Neutrality, mainstream-who are the only ones that matter-macroeconoimsts do. Those who don't are dismissed like you or I might dismiss a man declaring himself to be Napoleon or God's Thumb. Remember the angst Bertrand Russell had about how there has to be more reason to prove a man is not a poached egg than that the govt doesn't agree with him. Rorty's argument is basically, no there isn't. 

    P.S.S.S My point is not to discourage, just trying to make it clear what's at stake. Zizek thinks there's virtue in the Lost Cause.

   I'm not a Zizekean to be sure but that's a conversation another day. 

    UPDATE: I like this quote by Waldmann

    "My way of putting this is to consider the PIH an alternative hypothesis to the Keynesian null that intertemporal budget constraints can be neglected when modeling aggregate consumption"

  . - See more at:

President Obama's 2014 Agenda: 'I have a Pen and I Have a Phone'

      As the President's 2014 State of the Union approaches one can't but reflect that while he had the right agenda last year-immigration, the minimum wage, unemployment-the Republican Congress thwarted him at every turn. 

      I'd like to be an optimist that this year will be different but have to admit that I can't see why the GOP will be more reasonable this year. I do see that on some things they'll probably be a little less crazy-I think they may finally see that debt ceiling chicken and govt. shutdown chicken are kamikaze missions-though even on this Boehner's words lately have been somewhat ambiguous.

     While I don't think Boehner wants more debt ceiling chicken I do think that any kind of positive agenda will still have a hard time getting through the obstructionist GOP House-at least we got some let up on the sequester. 

     So I'm happy to hear the President is not taking this lying down. He does have a pen and a phone and to me the question is not whether he should do this or not but only just what kinds of things can he get done this route. Boehner and company worry that he's forgetting we have a constitution. 

     "There are several instances that buttress Speaker Boehner's position, including the Supreme Court. He is going to lose on the HHS mandate. He is going to lose on recess appointments. He lost nine to zip in religious liberty case. Greta, he says he has a phone and a pen. I would tell him to be careful using the phone this day and age. You never know who is going to be listening in on the conversation. But he has had a phone and a pen for five years. And we have an anemic economy, a feckless foreign policy, and people are losing hope. So rather than accept responsibility, he wants to blame Congress. That's what he means by this, is I'm going to blame Congress. Their recalcitrant, they won't work with me. He has had half a decade and here we sit."

     Everybody blames Congress-just see the polls-and rightly so. However, there's nothing unconstitutional about the executive order and there was no GOP worry over this when President W. Bush signed a record number of EOs during his time in office. On the other hand Obama will have to write a lot of EOs in the next few years to have even an average amount.

     Beyond the EO-and calling colleges and nonprofits as he suggests he will-what we need remains the same. We need to get the GOP out of the House which won't be easy with all the gerrymandered districts. Hopefully these liberal grass root organizations which have shown their power on other issues-like voting rights-will find a way to fight back on gerrymandered districts-otherwise the problem may not be wholly solved until the next Census in 2020. 

Saturday, January 25, 2014

How You Know When You're Reading a Freshwater Economist

      Stephen Williamson has tried to claim there's nothing there-no difference, it's a distinction wholly contrived by 'journalists'-by which he means Paul Krugman and Brad Delong.

       However, I think that the style gives it away. By their style ye shall know them. 

       "Why do I have to read this? The paper contributes nothing - not even an opinion or belief - on any of the substantive questions of macroeconomics...One can speculate about the purposes for which this paper was written - a box in the Economist? - but obviously it is not an attempt to engage other macroeconomic researchers in debate over research strategies."

     This was the reaction of Bob Lucas regarding Greg Mankiw's 1994 'New Keynesian Manifesto.'

     Compare this to Tony Yates.

     "There’s something irksome about defending micro-founded macro from the attack that it is ‘without merit’.  A voice inside me says:  if they aren’t doing macro, by which I mean, generating new empirical or theoretical work themselves, who are they to go about proclaiming whether something has merit or not, or how macro should be done?  [I'm not singling out Adam here.  Lots are at it.]  And why should anyone care what they say?"

     "In my time in central banks one definitely encountered a breed of policymaker that behaved as if they were above actually doing macro, but yet seemed to know all the answers for sure, and know how macro should be done [of course by someone else, not them].  It seemed to many of us who observed them as though they had fallen victim to the illusion that since they had done so well in life, their gut feelings about stuff must really be valuable, and that perhaps that’s where macroeconomic truth lay, in what they as great individuals felt and said.  Many can tell stories of attempting to advise them, and being met with the condescending twinkle in the eye that translates as ‘Ah, so that’s what’s true in your silly little toy world, is it, tee hee, how quaint that you think such things worth repeating, well, I can only hope that one day you glimmer the real source of truth, namely, the instinctive knowledge of the chosen’.   If the meme that microfounded macro has ‘no merit’ were to gain any more traction, I assert that great danger would lie ahead!:  theorising that is incomplete and ‘accidental’ [in the sense meant by Krugman];  policy promises that are unverifiable;  discretion untamable;  and a search for new economic knowledge that is empty and futile (since the truth is already felt by the great policymakers, and the only way to divine it is to draw the few charts they ask us to plot, and sit around and wait until the charts work their inner magic and they are kind enough to write it down in speeches for us)."

     It's funny that SW argues that the 'journalists' see this as Star Wars.

      "In terms of what you have written in this post, you just haven't got it. Here, you've mischaracterized my motives, as if I'm driven by anger and emotion. I've thought about these issues carefully, and gone to some effort to try to correctly characterize what is going on. You seem to be embedded in some fantasy wrestling match world of smackdowns, good guys, bad guys, winners, and losers."

      "I'll give your original post with Miles credit for being well-written. But, forget the nuance. It's primarily a work of fiction. What's going on in Minneapolis is pure Shakespearean tragedy. There are no winners in that episode. This ain't Star Wars."

     Well speaking of 'good guys and bad guys' listen to Robert Barro circa 1994. 

     "There has been some blog discussion lately (see Tyler Cowen and Scott Sumner) about Robert Barro, the famous Harvard economist who invented the controversial idea known as "Ricardian Equivalence", and who occasionally writes op-eds in the Wall Street Journal opposing fiscal stimulus. Cowen, Sumner, etc. are discussing whether Barro supports the idea of "aggregate demand" as a driver of business cycles. The paper most people know about is this one, but I thought it would be a good time to bring up Barro's epic polemic against New Keynesian model."

      Speaking of the Freshwaters I'm now reading a very interesting book by Thomas Sargent on Rational Expectations he wrote back in 1986.

     An example on pgs. 1 and 2 though on why models should keep in mind that behaviour change when the rules of the game change. The example he gives is interesting. He argues that if a football team-say the Seattle Seahawks punts 80% of the time when the ball is in their own territory should you expect them to do that in the future too-should you bet on this?

     He points out that while you could make money betting on this without knowing anything about football at all, you could get caught unaware if suddenly the NFL changes the rules to 6 first downs per possession. It's an interesting example yet I think this example doesn't wholly work as-if you do know anything about football you know it's unlikely that this would happen. Maybe your assumption that the sun will rise tomorrow assumes a certain kind of 'rules of the game' but it's still a pretty secure assumption. 

     Also there's a very interesting discussion of monetary effects-do deficits have any impact on inflation or not? Full Ricardian Equivalence would say no but Friedman's argument back in 1949 would suggests the opposite extreme-any rise in the deficit is a total equivalent rise in inflation. Sargent suggests the answer must be somewhat in the middle. When the deficit rises the market assumes the govt will have to rise inflation at least somewhat to cut the deficit. 

     At the time-1986-we had the huge Reagan deficit. Sargent thought that this was a real inflation rate-so did many liberals, it's true-Mondale made it a centerpiece of his criticism of Reagan in 1984. However, we have to say in retrospect, that the Reagan and Bush Administrations-I'm thinking primarily about W. but it's also true of the H.W. Bush-we get a natural experiment of a sort of this and RE seems much closer than Friedman to the truth at least empirically as there was no inflation spike due to any of the deficits. 

Friday, January 24, 2014

Is There Such a Thing as a Liberal Market Monetarist?

      Sumner and friends have often intimated yes.

      Sumner has gone further and intimated that Keynesians are political in their argument for fiscal stimulus-they just want bigger government-while intimating that the same is not true of Monetarists-who argue that we should only use monetary policy for AD.

       I see that Tom Brown seems to have bought the argument based on a comment he wrote in a recent post.

       "Also, I'm going to say that it's quite possible to be a liberal MMist: you could be all for more gov involvement in things and still think that monetary policy using NGDPLT trumps fiscal policy every time for the purpose of avoiding unnecessary recessions or depressions (caused by shocks)."

       I've got to say I disagree with this and that in fact it's at the crux of my whole problem with MMers. I think they package it this way.

     "If I was a socialist my views on monetary policy would be exactly the same, target NGDP. I guess you never heard about the liberals who favor NGDPLT."  

     "Garrett gets it, so why can’t you?"

       Here's what the commentator Garret writes:

      "It seems to me that one could implement NGDPLT while still setting government spending at whatever % of NGDP is desired."

      "In fact, I’ll do it right now. I propose that the US government increase the tax burden to 48.2% of GDP and increase government spending to 56% of GDP. That would put us right where Denmark is, a country that Prof. Sumner has written highly of several times on this blog."

      "So supposedly those who call for fiscal stimulus want big government but those who call for monetary policy alone don't favor small government? I've got to say that Scott is a tremendous propagandist. I can't but admire how so many who read him repeat him word for word in parrot fashion. Here is the commentator J. Mann

      "Mike, if Scott’s right, then we could have gotten out of the recession years ago if Obama, Krugman, etc. had clearly followed the following strategy."

       "1) We need to try unconventional monetary stimulus to get the economy moving. If not offset by the fed, an employer side tax cut would also be a good idea."

        "2) As a related issue, while long term rates are low, this is a good time to finance the following positive value government projects: a, b, c. "

      "Then even if (2) was politically infeasible, at least you could exert pressure in the direction of (1). Now it’s true that Obama and Krugman want a bigger government than I do, but presumably we all wanted the recession to end." 

      "If Scott’s not right, then (1) would be a waste of time, but if he is, then Obama left money on the table by giving up on monetary policy early on, and the best case you can make for Krugman is that he failed to clearly articulate that unconventional monetary policy might work and was worth trying."

      He even agrees with him to do a payroll tax cut only for employers-employees get no tax cut. I've never said don't do 1 and 2. I'd be fine with the current Evans Rule but no sequester for instance-at least this year the level of fiscal consolidation is decreasing.

      It's Scott who insists as a religious conviction that we can't do 2. I see no reason why any liberal has to eschew fiscal policy. What would be the reason? There is none. If you want smaller government as Morgan Warstler admits forthrightly no explanation is necessary.


Thursday, January 23, 2014

Cantillion Effects Anyone?

     This touches on something I wrote about yesterday where Mises seemed to be suggesting that fiscal policy is preferable to monetary policy.

      Now I just came across a back and forth Sumner, his Market Monetarists, and the Austrians-Bob Murphy, et. al-had over Cantillion effects a little over a year ago.

       It again kind of got me thinking that on this issue-maybe-the Austrians are closer to the Keynesians. Don't get me wrong: I don't think that Austrians and Keynesians are on the same side. The Monetarists and Austrians are on the same side against the Keynesians though for tactical, strategic purposes they can't admit this.

       What I'm saying is that politically the Monetarists and Austrians are on the same side and both have the same objective in view: kill Keynesianism by any means necessary. Do you find my choice of words over the top? Sumner has actually spoken of 'driving a stake through the heart of Keynesians' and that 'Keynesianism isn't sleeping its dead.'

        However, on this theoretical point on the face of it Austrianism sounds closer to Keynesianism than Monetarism. Sumner and the Monetarists-Market or otherwise-insist that it makes no difference where a monetary injection is implemented.

     Here are some links to the debate.

     The Austrians-going back to Mises-think it matters. Surely if there's a monetary injection it matters at least at the individual level. That must be true, I mean if the Fed evenly disburses newly printed money of $1 billion dollars or for some inexplicable reason gives it all too me, it sure makes a difference to me but what about the macroeconomy? Sumner and friends say no. Of course, I'd put the money in the bank and from that point, it would all go exactly the same according to Monetarism.

    However, Sumner did offer an interesting qualifier. It doesn't matter where a 'helicopter drop' happens, unless it's also a fiscal action as well.

     "Consider the following four monetary policy injections, where fiscal policy is held constant in each case."

      "1.  Newly injected base money is used to buy T-bonds from banks."

       "2.  Newly injected base money is used to buy T-bonds from non-bank securities dealers."

       "3.  Newly injected base money is used to buy T-bonds from individuals at a special auction excluding bond dealers."

       "4.  Newly inject base money is used to pay the salaries of government workers, and as a result less money is borrowed by the Treasury.  The Treasury then creates and donates a T-bond to the Fed."
       "In all four cases the increase in the amount of base money is identical.  In all four cases within about one week the increase in currency held by the public and bank reserves is virtually identical.  In all four cases the impact on debt held by the public is identical.  Thus the impact on interest rates is virtually identical in each case.  In all four cases the impact on the purchasing power of various groups in society is virtually identical."

       "Bonds are purchased at market prices.  It simply doesn’t matter how the money is injected, if we assume a pure monetary policy with no change in fiscal policy.  Of course a “helicopter drop” is also a fiscal expansion, and hence would produce slightly different results."

     Helicopters are problematic in themselves-I mean is there ever a helicopter drop that isn't also a fiscal action? To not be a fiscal action would mean that the federal government isn't needed to either borrow or tax. Nick Rowe further elucidates this ambiguity by saying flat out that the debate over Cantillion effects is really a debate over whether fiscal policy matters. Basically if it does then it matters where the injection point in a monetary action is if it doesn't then it doesn't matter.

     So maybe the difference is that the Monetarists defined fiscal vs. monetary actions differently than Keynesians and Austrians?

     UPDATE: Richman's Austrian article that started the whole conversation.


Wednesday, January 22, 2014

Ludwing Von Mises for Fiscal Policy?

     He seems to be suggesting here that fiscal policy is better for achieving certain policy aims:

     "In the first place, all the aims of inflationism can be secured by other sorts of intervention in economic affairs, and secured better, and without accidental effects. If it is desired to relive debtors, moratoria may be declared or the obligation to repay loans may be removed altogether; if it is desired to encourage exportation, export premiums may be granted: if it is desired to render importation more difficult, simple prohibition may be resorted to, or import duties levied. All these measures permit discrimination between classes of people, branches of production, and districts, and this is impossible for inflationary policies.'

    "Inflation benefits all debtors, including the rich, and inures all creditors, including the poor; adjustment of the burden of debt by special legislation  of differentiation. Inflation  encourages the exportation of all commodities and hinders al importation; premiums, duties, and prohibitions can be employed discriminatorily."

     Mises  "The Theory of Money and Credit." pg. 120.

    I'm not saying he was a Keynesian-he certainly ascribed to be anything but However, he does sound more Keynesian than Monetarist here does he not? This passage also gets me thinking about something else Austrians believe in: Cantillion effects-that it makes a difference where in the economy money is injected-Monetarists think it's irrelevant.

    Here he sounds like he's saying that fiscal policy does less harm and has an actual chance at achieving it's stated aim.

    UPDATE: Mises goes on to say that 'inflationism'-that is to say monetary policy is bad policy, "because it's incapable of fully attaining its goal and because it leads to consequences that are not, or at least not always, part of its aim. The favor it enjoys is due solely to the circumstance that it is a policy concerning whose aims and intentions public opinion can be longest deceived. It's popularity, in fact, is rooted in the difficulty of fully understanding its consequences.'