Monday, September 25, 2017

Life's little ironies

Yglesias at VOX: The economy really is broken — but we know how to fix it

No, we don't know how to fix it. And thinking that we do is part of the problem.

Census data released last week revealed that 2016 was a second straight strong year for median household income growth. Consequently, inflation-adjusted median household income is now at an all-time high, finally surpassing the previous record set in 1999...

Anyone who predicted in 1999 that median income would be lower in 2015 would have been regarded as ridiculously pessimistic, and nobody would have thought that quibbling over exactly how we calculate the inflation rate was the difference maker.

Something really is badly wrong.

The good news in the census report is that what’s wrong is fairly straightforward, easy to understand, and conceptually simple to fix. It requires a sense of political urgency that’s been lacking.

No. Ever since Martin L. Gross's 1993 book A Call for Revolution I hear that what's missing is the political urgency. Wrong. It's flat out wrong.

The argument is: We know how to fix the problem, but we lack the political will to do it. Bullshit. If they knew how to fix the problem, they'd fix the problem. Do you really think the Dems wanted to lose control to the Republicans? I don't think so. I think that if the Democrats knew how to fix the problem they'd have fixed it. That way they'd have been king of the hill for decades, like what happened after FDR.

Do you really think the Republicans wanted to lose control to Trump? I don't think so. If the Republicans knew how to fix the problem they'd have fixed it, instead of having to redistrict and restrict voter rights to gain king-of-the-hill status.

And if voters thought either of the parties knew how to fix the problem, they wouldn't have elected Trump. So no, it is not true that we know how to fix the problem and only lack the political will to do it. It's not true. And the evidence is: We elected Trump.

In short, the country has gotten a lot richer on average, and yet the typical household hasn’t gotten richer at all...

What we need to do is tax the rich, spend the money on the poor, and prioritize fighting recessions as a core economic policy mission that’s more important than low inflation or high bank profits.

But what's "more important" depends on one's point of view, doesn't it. Meanwhile, the economy has degenerated into an "us versus them" struggle because we've failed to fix the problem. The wrong answer makes the problem worse as economic decline puts employer and employee at odds, making it seem that the solution must be to pick a side in the battle, and fight harder.

It won't work. The economy is not "us versus them". We're all in it together.

Median household income has been essentially flat since 1999...

Reflecting this reality, the poverty rate is higher today than it was in 1999.

The solution to both facets of this problem is simple: taxes. Higher taxes on very high wages and higher taxes on investment income.

This is an "us" solution. "Them" won't go for it. And "them" have the money and power and influence.

I'm not saying Yglesias is wrong about raising taxes. But he is not presenting a fix for the economy. He is presenting a fix for one side only. He builds his argument on us-versus-them:
The rich, as it turns out, have a very different set of concerns than does the rest of the population. In particular, they don’t necessarily suffer during times of high unemployment...

Lucky them. But the rest of the country needs a government that’s fanatically committed to fighting recessions.

Fanatically committed?

You know about the Fed, right? The dual mandate? "The monetary policy goals of the Federal Reserve are to foster economic conditions that achieve both stable prices and maximum sustainable employment."

"Maximum sustainable employment" doesn't sound fanatical. But it does sound reasonable -- at least until you look at economic conditions, I know. I know. But I would argue that the reasonableness of the dual mandate is not the problem. I would say we don't know how to fix the economic problem. And thinking that we do, well, that's part of the problem.

One of life's little ironies: The Fed's "dual mandate" instructs the Fed to do the two things that are part of the trade-off known as the Phillips curve. Whichever one the Fed chooses to do will undermine the other.

These days, economists say "the Phillips curve is broken." You know why it's "broken"? The dual mandate.

This part is good. Yglesias says:
One problem is that the top 5 percent includes all the members of Congress and all of the donors and lobbyists and business leaders whom members of Congress speak to. It also includes all the Federal Reserve governors and regional bank presidents and all the business leaders whom they speak to. It includes the top editors of all the major media outlets and most of the star talent. For that matter, it also includes most of the leading economic experts at top universities.

All else being equal, of course, political elites prefer lower unemployment to higher. But it simply isn’t instinctively urgent in elite circles the way a financial market panic is.

We still do have the right to vote, but it doesn't seem to help. I think there's a reason for that.

The reason is that we don't know how to fix the economic problem. I think that if we fixed the economic problem most of the other problems would go away, and the rest would be easier to fix.

Since we don't know the right fix for the problem, we can't agree with each other on a solution. But the issues are immensely important, so we become "partisan". And it only gets worse from there.

Since all the people who disagree with each other think they know how to fix the problem, they can only conclude that the other guys are wrong.

Yglesias thinks Yellen is wrong:
Janet Yellen’s Federal Reserve is raising interest rates to slow job creation in order to head off the possibility of future inflation even though actual inflation remains below target.

Yglesias himself takes the other position:
For the economy to work for normal people, the federal government needs to be obsessed with avoiding recessions and making them as short as possible. If that means short bursts of inflation during supply-side shocks, or reduced bank profits due to restrictions on lending, or high deficits to stimulate the economy, we need to be willing to make those trade-offs.

I'm not saying Yglesias is wrong. For the economy to work for "normal people" we need work for normal people. But Yellen has work to do, too, and it's a job that has to be done. Don't make it us-and-them. Think of it more as a dual mandate for the nation. Not just for the Fed, but for the nation.

It is funny, though, when the guy arguing for more inflation takes the view that inflation will only come in "short bursts". That's not the kind of inflation that bothers the other side. But Yglesias isn't writing for those guys.

Just to tie up a loose end, recall Matt Yglesias saying

... the top 5 percent includes ... the top editors of all the major media outlets and most of the star talent.

I asked google is matt yglesias in the top 5% of income earners? and this turned up: Matt Yglesias' $1.2 Million House Stokes Class Envy in Conservatives.

Yglesias isn't writing for the top five percent. But he's part of it.

Sunday, September 24, 2017

George Selgin

Selgin trashes Sumner's story:
... why hasn't the Fed achieved higher NGDP growth? To observe that it hasn't done so because it hasn't been directly targeting NGDP won't do. After all, a 2 percent inflation target implicitly calls for whatever NGDP growth rate it takes to achieve 2 percent inflation.

Thank you, George.

Saturday, September 23, 2017

A Brief History of Microfoundations (plus afterthoughts)

Google the origin of microfoundations

Romain Plassard:
Robert W. Clower’s article “A Reconsideration of the Microfoundations of Monetary Theory” (1967) deeply influenced the course of modern monetary economics.

One particularly influential call for microfoundations was Robert Lucas, Jr.'s critique of traditional macroeconometric forecasting models.

Barney and Felin:
However, there is little consensus on what microfoundations are and what they are not.

J.E King (PDF):
It is widely believed by both mainstream and heterodox economists that macroeconomic theory must be based on microfoundations (MIFs). I argue that this belief is unfounded and potentially dangerous.



Economic forecasting has always seemed odd to me. Different than my way of foretelling the economy.

Lucas I think said that when you change the rules, peoples' behavior will change, yadda yadda, and so you have to have microfoundations. Okay. And lately there is "behavioral" economics, I guess to account for the "peoples' behavior will change" part, and to relax the microfoundations.

I just look at monetary balances. Debt per dollar. Private debt relative to public debt. Things like that. If the ratios get out of whack, the economy gets out of whack. This has nothing to do with human behavior or changing it. Monetary balances over time.

If debt-per-dollar is too high, we have to lower it. My prediction is: After we lower it, the economy will improve. My prediction tells you what needs to be done.

Lucas says you have to do forecasting right or your prediction will be wrong. Behavioralists say yeah but doing it right is not the way Lucas said.

My opinion, these guys don't even know what needs to be done.

Friday, September 22, 2017


Bruegel: Europe’s fourfold union: Updating the 2012 vision

The depiction of the euro area/European Union (EU) as a ‘fourfold union’ (financial union, fiscal union, economic union, political union) emerged in the first half of 2012 at the height of the euro-area crisis. It was primarily shaped by the recognition of the bank-sovereign vicious circle and the need to break it to ensure the survival of Economic and Monetary Union (EMU).

The bank-sovereign vicious circle? Okay...

And the need to break it? Okay...

To ensure the survival of Economic and Monetary Union? Why?

This framing of EMU and EU integration is inevitably simplistic but its four-part categorisation remains relevant and useful when assessing current and future challenges to European integration.

Fuck European integration.

Political union, a more intangible notion, might have advanced further than many observers realise, even as national politics remain paramount for the vast majority of EU citizens.


A near-term agenda to strengthen EMU, for which decisions could be made in the course of 2018 and without any treaty change, should rest on a balance of further risk-sharing and enhanced market discipline, building on the significant risk reduction achieved over the last half-decade.

Without any treaty change.

And definitely without any participatory democracy.

Complementary initiatives should include, on the fiscal side, a reform of the accounting and auditing framework that applies to euro-area member states, and on the (structural) economic side, a new architecture of sector-specific EU authorities to enforce the single market in regulated industries.

Without any treaty change.

A more ambitious vision would have to include the European pooling of selected tax revenue streams to support an incipient fiscal union.

"Even as national politics remain paramount".

This whole thing is driven by wealth, praised by policymakers who can't solve their own nations' problems, and supported by a dying middle class desperate for economic recovery.

Economic problems demand economic solutions. You cannot solve economic problems with political solutions.

// See also: Delian League

Wednesday, September 20, 2017

Final definitions of Money and Credit

In an old PDF, Joe Salerno defines money: the final means of payment in all transactions.

At EconomicsHelp, Pettinger defines credit: any form of deferred payment.

These two definitions work. And they work together.

Tuesday, September 19, 2017

In case you don't get it...

David Beckworth, in The Knowledge Problem in Monetary Policy at Mercatus:

Inflation is caused by both supply and demand shocks. Monetary policy can only productively address the latter, but discerning which type of shock has caused inflation in a particular instance is almost impossible for Fed officials to do in real time.

In case you don't get it, Beckworth draws a picture:

See the two circles at the top of the picture? How do we know there are only two circles? It's an assumption. Maybe the picture should look like this:

What could be in that third circle? Here's a thought: policy. Maybe it's policy that's causing the inflation problem. And maybe the solution is not to tighten or loosen, but to try something else with the money. Something like keeping an eye on the ratio of credit to money.

Imagine that.

Monday, September 18, 2017

Beckworth gets it

Milton Friedman quoted JS Mill. I requote it often:

There cannot, in short, be intrinsically a more insignificant thing, in the economy of society, than money ... [Money] only exerts a distinct and independent influence of its own when it gets out of order.

Here's Friedman himself:

Money is so crucial an element in the economy, yet also largely an invisible one, that even what appear to be insignificant changes in the monetary structure can have far-reaching and unanticipated effects.

David Beckworth explains:

... money is the one asset that is a part of every transaction. Whether the transaction is the sale of a physical or financial asset, a good, or a service, money is always a part of the exchange. It reaches into every market. Consequently, destabilizing money destabilizes all markets.

"Money is the one asset that is a part of every transaction." Memorize that.

When a problem affects the whole economy, like inflation or unemployment for example, one of the first things to consider is the money: "Is there a problem with the money?" Always. Even if the problem appears quite certainly to be "peak oil" or "too much immigration" or "China".

Sunday, September 17, 2017


You know about the Fed's 2% target for inflation. Since 2012 I think, that's been the official target.

Thomas Palley, in 1996, in The Atlantic, wrote:

most economists support policies of zero inflation achieved by high real interest rates

Myself, I'm no economist. But I think economists should be embarrassed to support any inflation other than zero. I think they should see the call for 2% as an admission of failure -- a failure of policy, and of the theory behind it.

Anyway, it occurs to me that using high real interest rates to achieve an inflation target has the unintended consequence of increasing aggregate financial costs to the economy. Let's say unintended.

Imagine an alternative way to fight inflation. If we design and implement tax policy to encourage the accelerated repayment of debt, we have a new way to limit aggregate demand. But the new policy includes the intentional consequence of reducing aggregate financial costs to the economy. It may not seem that way now, because private debt remains at such a high level. But as the new policy pushes down debt-to-everything-else ratios, the effect will soon become clear.

Saturday, September 16, 2017

When Palley and Taylor agree...

I switched on a computer that had been off for six months, and found something I didn't remember putting on the desktop: The Forces Making for an Economic Collapse (subtitle: Why a depression could happen) by Thomas I. Palley in the July 1996 issue of The Atlantic.

That's July of 1996.

I was going to quote Palley where he says a new Great Depression has become possible -- 1996, remember -- because it shows remarkable foresight. Instead, I'll file that under Recommended Reading and move on.

Here, Palley describes policy shortly before the "Goldilocks years" of the mid-to-late 1990s were to become obvious in hindsight:

... the Fed now interprets any sign of wage increases as incipient inflation, and responds by raising interest rates. Since wage increases are the means by which labor shares in productivity growth, this policy is tantamount to helping corporate and financial capital to gang up on labor.

The Federal Reserve vividly illustrated its new stance in 1994, when it raised interest rates six times. Just as the long-awaited economic recovery was picking up steam, the Fed slowed employment growth. It claimed that its action was necessary to prevent inflation from accelerating, but never produced compelling evidence of the danger of inflation...

The story since December 2015 is similar.

Palley didn't know it in July of 1996, but the economy was strong enough then to withstand a series of interest rate hikes and move ahead with vigor nonetheless.

We don't know it yet, but the economy today is probably strong enough again to withstand a series of interest rate hikes and still move ahead with vigor. And strong enough for the same reasons.

One more quote from Palley to emphasize the similarity between the 1990 recession and recovery, and the 2009 recession and recovery. While the '90 recession was still fresh in his mind, Palley wrote:

Just as the causes of the 1990 recession have been poorly explained, so have its prolonged nature and the weakness of the subsequent recovery. Economists consider the recession to have ended in the first quarter of 1991, but substantive recovery did not really begin until the second half of 1993. Thus for almost three years the economy was effectively dead in the water.

Dead in the water. We know about that. For crying out loud, even John Taylor in 2016 was saying "In several key ways the US economy resembles an economy at the bottom of a recession, ready for a restart".