Thursday, October 20, 2016

Nominal and Real Interest Rates

The persistence of low interest rates has dominated the news. In general related to whether the Fed will or will not increase the interest rate by the end of the year. The Economist tried a few weeks ago to put things in perspective, and suggested not only that the current nominal rates close to zero are unprecedented, but it sort of indicated that the negative real rates are also to some extent a new phenomenon. The explanations for low rates can be found here, and the consequences, according to The Economist here (btw, for them is a pension crisis; and yeah, just wait this will be used to call for privatization).

I'm not particular keen, as you know, on the idea of a savings glut, as an explanation for the low rates. The reason is much simpler and is associated to the fall out from the previous crisis. But at any rate I just wanted to check the data. They showed the nominal short term rate in the UK (below), which is not very different from what can be found in other sources used here before (like this one).
However, they only show the real rate for the last three decades or so (see below). This seems to suggest, even though is never quite stated, that the current trend, with lower real rates is also unprecedented. But that is not the case.
In fact, what is really unprecedented is the fact that in previous eras of low or negative real rates, as far as I can judge from the data, this was caused by relatively high levels of inflation, while now it is essentially the result of very low nominal rates (see below for previous eras of low or negative real rates; btw, my graph matches theirs, but the period is shorter for the nominal rate, and way longer for the real rate).
This seems to suggest to me that the explanation must be related to the short term nominal rate, which is a policy decision of the central bank, rather than something that affects the levels of inflation, and according to some theories what that does to inflation. If I'm right then, the cause of the low rates is the financial excess of the last three decades, that forced central banks to keep rates low to save the economy, and preclude further problems. Very unlikely that would change any time soon.

Monday, October 17, 2016

Policy Challenges for the New US President

Economists for Peace and Security will conduct its 9th annual policy symposium at the Hyatt Regency Capitol Hill in Washington DC on November 14, 2016 to discuss the economic dimensions of the most pressing global security issues and those facing the domestic economy. Following one of the most unusual presidential and congressional elections in US history, three panels of senior specialists will present ideas for improving prospects for peace, and growth with fairness for all Americans.

Registration & Breakfast 
Global Security: Russia, China, Europe and Latin America
Chair - Richard Kaufman, Bethesda Research Institute
Michael Lind, New America Foundation
Mark Weisbrot, Center for Economic and Policy Research
Matias Vernengo, Bucknell University
Carl Conetta, Project on Defense Alternatives 
Keynote: James K. Galbraith, Economists for Peace & Security 
Jobs, Wages, Health & Social Security: What Next?
Chair - Sherle Schwenninger, New America
Josh Bivens, Economic Policy Institute
Nancy Altman, Social Security Works
Pavlina Tcherneva, Levy Economics Institute 
An Agenda for Growth, Clean Energy and Climate Stabilization
Chair - TBA
Stephanie Kelton, University of Missouri - Kansas City
David Colt, Efficient Resource Management​
Eban Goodstein, Bard Center for Environmental Policy

To register please click here.
For further information please contact Ellie Warren.

Sunday, October 16, 2016

On the blogs

Not Keen on more Chaos in the Future of Macroeconomics -- Roger Farmer on Keen's response to Blanchard. I'm not keen on chaos either

Contract this! --David Ruccio on the recent Sveriges Riksbank Prize (aka "Nobel"). I have no patience for explaining the prizes anymore

How Wells Fargo Exemplifies the Drivers of Big Corporate Fraud -- Yves Smith on the last financial scandal

Friday, October 14, 2016

A late note on the Economic Report of the President

This is a bit old. The Economic Report of the President was published a while ago. I just was looking recently, essentially because it has a chapter on the 70th anniversary of the Council of Economic Advisers (CEA). The report discusses the role of Leon Keyserling, the second chair of the CEA, but the most relevant one in the early period, who, like Eccles at the Fed, tends to be a relatively underestimated and forgotten influence on the rise of Keynesian economics (that's in this chapter). That is enough to make this Report worth reading.

But the first chapter (on inclusive growth) tackles the issue of inequality, and not just income, but wealth too. Below the shares in wealth distribution for the top 0.1%, 1% and the bottom 90%.
It's very clear that while the New Deal compressed the shares of the top groups, the Reagan Revolution has completely reversed the earlier achievements. And it is also clear that inequality is important also at the top, since the 0.1% do so much better than the 1%. And the early Keynesians like Keyserling and Eccles were partially responsible for the improvement in wealth and income equality back then.

Monday, October 10, 2016

Raúl Prebisch and economic dynamics: cyclical growth and centre-periphery interaction

New paper. From the abstract:
Prebisch believed that understanding the evolution of capitalist economies over time and in different contexts required a general cycle approach, encompassing all the different areas of economic activity, which he labelled “economic dynamics.” This theory, developed between 1945 and 1949, stemmed from a critique of both neoclassical and Keynesian theories, which Prebisch viewed as static representations of capitalism. It was applied first to a closed economy and then to a centre-periphery context. The theory combined the notion that profit is the driving force of economic activity, with a process of forced savings and the idea that the time lag between income circulation (and the resulting demand) and the completion of the production process are the main source of cyclical fluctuations. Prebisch’s dynamics theory, which he never completed, influenced his “development manifesto” (Prebisch, 1950).
Read full paper here

Sunday, October 9, 2016

On the blogs

Better than Adam Smith in Beijing

Sraffa’s visit to China in 1954 -- by Gabriel Brondino and Andrés Lazzarini reporting on Sraffa's (above) diaries

Why Republicans in the USA are "The stupid party" -- by Robert Vienneau, on the fate of the GOP

I Am Seriously Worried -- Barkley Rosser is afraid about the Donald

More methodenstreit -- Josh Mason on the Romer paper

Thursday, October 6, 2016

Lance Taylor on Loanable Funds and the Natural Rate

New paper on INET. Here is from Lance's conclusion:
... writing in the General Theory after leaving his Wicksellian phase, Keynes said that “... I had not then understood that, in certain conditions, the system could be in equilibrium with less than full employment….I am now no longer of the opinion that the concept of a ‘natural’ rate of interest, which previously seemed to me a most promising idea, has anything very useful or significant to contribute to our analysis (pp. 242-43).” Today’s New “Keynesians” have tremendous intellectual firepower. The puzzle is why they revert to Wicksell on loanable funds and the natural rate while ignoring Keynes’s innovations. Maybe, as he said in the preface to the General Theory, “The difficulty lies, not in the new ideas, but in escaping from the old ones… (p. viii).”
His point is that while there are good reasons to believe in the forces of stagnation, the reasons are not the Wicksellian ones given in New Keynesian models. Worth reading.

Wednesday, October 5, 2016

An Undergraduate’s Question about Economic Policy

By Thomas Palley

I received an e-mail from an undergraduate economics student who was curious about economic policy in Washington, DC. His question says a lot about the current state of affairs. Here it is with my reply.
From: Xxxxxxx Xxxxxxx []
Sent: Saturday, October 1, 2016 10:56 AM
To: mail
Subject: Question from an undergraduate
Dear Dr. Palley,
I am a first-year undergraduate in economics and political theory, and a longtime admirer of your work.
What are your thoughts on how Keynesian/Post-Keynesian ideas are treated in current political discourse?

I was in Washington D.C. recently and I had conversation with a Brookings fellow who told me that he thought Joseph Stiglitz was an “extremist who isn’t taken seriously by anyone who knows their way around the Beltway.”

Does it worry you that ideas which used to be considered “mainstream” (like social democracy) are now increasingly considered “extreme”?
Deeply grateful for your time and attention
Xxxxxxx Xxxxxxx
Read the reply here

Tuesday, September 27, 2016

Who won the debate?

Making Merica Great!
(Stand at the Bloomsburg Fair, in central PA)

This is always a complicated question, since most people tend to think that their candidate won. And you may ask: who cares? After all debates have probably limited impact on the elections outcome anyway. But I think it is important to note that while most of the media (yes, I follow the liberal media) suggests that Hillary won (see here or here or here), one should take those results with a grain of salt.

I think the initial round on trade was clearly better for The Donald. Not only because he sounded more concerned with lost jobs, and deindustrialization in the Rust Belt, which he did (she said that she wants to bring back the 1990s; "I think my husband did a pretty good job in the 1990s. I think a lot about what worked and how we can make it work again..." were her precise words), but also because that is the main constituency for the debate. He was not trying to win the votes of African-Americans or Hispanics. That's why he double down on the law and order and nativist discourse. He wants the votes of blue collar workers in swing states, crucial ones in the old industrial belt. And he scored big there.

Also, while he actually gets his base excited, it's difficult to say the same about Hillary. And yes she sounds presidential. But the fact, that he doesn't sound presidential is what makes him appealing to his base. It's his strength not his weakness.

Winning the debate should be about that, who increased the chances of winning, and, if you ask me, he appealed to his base, and reached for blue collar workers for whom the economy has been terrible as he suggests, and for whom the 1990s Clinton policies that she thinks worked and can work again (hopefully not financial deregulation... or NAFTA, for that matter) were part of the problem.* The debate yesterday reminded me why I thought Bernie was the better choice, and I fear that's what many young (nope I'm not young anymore) progressives might have taken from it too.

Finally, it is important to note that almost everyone has been writing his political obituary since the election cycle started. His first answer, when he said he wouldn't support another GOP nominee was supposed to be the end. In the first debate. So most of the pundits saying she won now do not have a good track record. Even if many (not all, but some very visible, as per photo above) of his supporters are deplorables, it's worth noticing that their economic grievances are real.

Note that this doesn't mean he is going to win the election. Demographic changes make it harder for Republicans to win now, since Dems get more of the electoral college to start with. And I hope he doesn't, btw. But there are good reasons to be afraid. This is going to be way closer than it should be.

* The fact that she has not fully renounced Clintonomics, i.e. financial deregulation, austerity (End of Welfare as we know it) and free trade, is a problem for the progressive base of the party. She walked back some of these, mostly after pressure from the Bernie campaign, but is unclear that these changes would stick.

Friday, September 23, 2016

The Trouble with Paul Romer's Angriness

Count to 10

The paper by Paul Romer, The Trouble with Macroeconomics, has been in the news, and many bloggers have posted about it (Lars Syll here, to name one) and some of the major newspapers (for example, here and here). This follows his previous critiques on what he referred to as mathiness. It's also important since now Romer is the World Bank's chief economist. In all fairness, the only refreshing thing in the paper is the sarcasm, and the internal sociological critique of the profession that "places an authority above criticism."

This paper is better than the previous one on mathiness. He clearly notes that Real Business Cycle (RBC) models including in the synthesis version with New Keynesian models, the Dynamic Stochastic General Equilibrium (DSGE) models he discusses, use productivity shocks as something akin to phlogiston. He's not wrong. My favorite quote is this one also by Ed Prescott, Romer's bête noir, who argues that:
"In the 1930s, there was an important change in the rules of the economic game. This change lowered the steady-state market hours. The Keynesians had it all wrong. In the Great Depression, employment was not low because investment was low. Employment and investment were low because labor market institutions and industrial policies changed in a way that lowered normal employment."
So you ask: what was the negative shock that caused the Great Depression? Lucas, a mentor and friend of Prescott that shares his views, said (cited here) about this: "Where is the productivity shock that cuts output in half in that period? Is it a flood or a hurricane? If it really happened, shouldn't we be able to see it in the data?" [For more on the problems with the interpretation of the Depression go here]. And Romer is right also that Friedman's instrumentalism, the idea that it is "as if" there is a negative productivity shock, is not serious.

In his paper, Romer takes issue with Prescott's explanation of productivity shocks as being like "that traffic out there." Here is his explanation of why this is problematic:
"What is particularly revealing about this quote is that it shows that if anyone had taken a micro foundation seriously it would have put a halt to all this lazy theorizing [about imaginary shocks]. Suppose an economist thought that traffic congestion is a metaphor for macro fluctuations or a literal cause of such fluctuations. The obvious way to proceed would be to recognize that drivers make decisions about when to drive and how to drive. From the interaction of these decisions, seemingly random aggregate fluctuations in traffic throughput will emerge. This is a sensible way to think about a fluctuation. It is totally antithetical to an approach that assumes the existence of imaginary traffic shocks that no person does anything to cause."
This is very close to getting lost in the analogy, but at any rate, for what is worth, Romer is essentially fine with the methodological individualism of marginalism, and he implies that if you look hard enough you can find in the behavior of economic agents the reasons for why productivity fell and caused a Depression. There is no discussion of causality issues, which are central in the understanding of scientific differences, and why productivity might be endogenous. Romer perhaps thinks, not differently from Lucas or Friedman, that the Fed caused the Depression.

While the tone of the paper is that "Keynesian" ideas that money matters are relevant, and that RBC and DSGE models (or some of them) can't even get the effects of the Volcker stabilization right, it is probably true that Romer doesn't get it either. Anybody that worked with Phillips curves knows that the output gap is relatively weak, and that in order to get reasonable results supply side factors must be included (often the price of oil and other commodities). So the fall in commodity prices, and the indirect effects of the recessions on the bargaining power of the labor force (besides other things like Reagan's anti-union policies) played a role in the stabilization.

And should I mention that Romer writes a whole paper on the troubles with macroeconomics without one single note on the limitations of the idea of a natural rate of unemployment (or interest) and the inability of economists, which use it all the time for policy purposes, to even measure it? Oh well. Now the World Bank, with him as chief economist, will emphasize even more the need to spend on "human capital," because knowledge unleashes increasing returns and development. Yeah nobody though that education was central for development [and he doesn't even think of reverse causality]! Don't get me wrong, macroeconomics has been in trouble since the 1930s, when it developed as a field, but Romer's ideas are not particularly helpful. Being angry at RBC and New Classicals (angriness?) does not provide a clear path for macroeconomics.

PS1: I won't even go on the fact that he thinks that the Cowles Commission methodology is flawed, a position he shares with Lucas and Sargent. On that Ray Fair has said:"If the macro 2 [the RBC/DSGE models Romer criticizes] message is not sensible or its methodology is not feasible for estimating realistic models, it is perhaps time to move back to macro 1 [the Cowles Commission models that Romer also thinks are problematic]. This requires dropping the assumption of rational expectations and trusting the theory to impose exclusion restrictions." I may not agree with Fair, and other Old Keynesians (not sure he would like that label), on the restrictions that need to be applied, but at least methodologically we're on the same page. Not sure what Romer wants.

PS2: Romer doesn't even know of the problems with the growth accounting methodology and Solow's residual. On that see this paper by Jesus Felipe and Franklin Fisher.

Thursday, September 22, 2016


Marginalist ReOrientation

Slow posting for a while. Too many things happening that I didn't comment on, but I'll try to weigh in on the paper by Paul Romer on the trouble with macro. At any rate, the paper DisORIENT: Money, Technological Change and the Rise of the West has been published.

Tuesday, September 13, 2016

The Federal Reserve Must Rethink How it Tightens Monetary Policy

By Tom Palley

After more than 7 years of economic recovery, the Federal Reserve is positioning itself to tighten monetary policy by raising interest rates. In light of the wobbly reaction in financial markets, an important question that must be asked is whether raising interest rates is the right tool.

It could well be that the world’s leading central bank is going about the process of tightening in the wrong way. Owing to the dollar’s preeminent standing, that could have severe global repercussions.

Just as the Fed has had to rethink how it combats recessions, so too it must rethink how it transitions from an easy monetary policy stance to a tighter stance.

Read rest here.

Sunday, September 11, 2016

On the blogs

Drivers of inequality: Trade shocks versus top marginal tax rates -- Douglas Campbell and Lester Lusher suggest than in the US inequality was caused by the tax policies that began with Reagan, and not globalization. Seems reasonable (a post from almost precisely 4 years ago)

Economists Who’ve Advised Presidents Are No Fans of Donald Trump -- Greg Mankiw's blog linked to this piece. I doubt that Feldstein is right. Yeah, Reagan "showed a real understanding of economics and international affairs." Funny thing is that the Donald's views on trade, because of his economic populism, might be more reasonable than the economics profession's dogma on free trade (my reply to Mankiw on free trade here). And nope I'd never vote for the Donald either, if you ask me

Meritocracy vs. Freedom -- Chris Dillow on Theresa May, but also on some deeper and more relevant, on whether free markets are compatible with meritocracy