September 15, 2003
What Will the Fed Do Next?

Greg Ip writes: - Fed Is Unlikely to Change Rates, But Future Course Is Uncertain: The economy is strengthening and inflation has stopped falling, both welcome signs for the Federal Reserve, which is almost certain to leave its interest rates unchanged when it meets Tuesday. The more important question will be what, if anything, the Fed signals about the future direction of interest rates. In May, the central bank said risks to economic growth were balanced but the risk of inflation falling too low outweighed the risk of rising inflation. The Fed repeated that message in June, when it cut its short-term rate target to a 45-year low of 1% from 1.25%, and in August, when it added that rates could stay low for a "considerable period." But since then, the economy has been surprisingly strong and inflation has shown signs of edging higher... That's not quite right. Since then, the economy has been surprisingly strong and surprisingly weak: news about output growth has been surprisingly good; news about employment losses has been surprisingly bad; the wedge between them--productivity growth--appears to have grown larger. Were I sitting on the FOMC, I would be more impressed by the employment than...

Posted by DeLong at 12:57 AM

September 14, 2003
Note: Strong Views Weakly Held

In comments, A. Pressler asks: I've always wondered why inflation is such a huge bugaboo to AG and many corporate economists (other than their tendency to see things from the POV of lending institutions.) In my relatively short life, the only serious inflation problem was the supply-shock inflations created by energy costs in the 1970s.... I understand the theoretical arguments, but what is the worry when the inflation rates are still under 5% (as they were in the late '80s) or under 3% as for most of the Clinton administration? Well, the argument that inflation above 10% per year does serious harm to resource allocation and economic growth (as incentives get scrambled by an inflexible tax system, as nobody is sure what relative prices really are, and as perceptions of risk rise substantially) seems solid. And then you can argue that you need to keep inflation at 5% or below in order to eliminate the risk that a couple of bad shocks will land you in the bad zone of more than 10% annual inflation. You can also argue (and Larry Summers and I did argue back in 1992) that you want to avoid deflation and the liquidity trap--you want...

Posted by DeLong at 02:04 AM

September 13, 2003
Why Oh Why Can't We Have a Better Press Corps? Part CCCXXVIII

Today it's the New York Times that makes me want to bang my head against the wall: As Factory Jobs Disappear, Workers Have Few Options: But in June, Mr. Greathouse, 55, lost his job at the Hoover vacuum cleaner factory here, and with so many other factories laying off people, he is at a loss about what to do. "What does it do when you take away all these jobs from people who support families, who raise families?" he asked. "Manufacturing has been the strength of this country. If we can't make anything here anymore, what does that do? The fabric of this society is falling apart." Mr. Greathouse has a lot of company. In three years, Ohio has lost more than 160,000 factory jobs, representing one-sixth of its total. That is but a small fraction of the 2.7 million manufacturing jobs lost nationwide in those three years, many of them because of imports. Some economists say that even with a boom all those jobs are not likely to return. Factory unemployment has snowballed into a huge social and political issue across the Midwest, after manufacturing in the region boomed in the 1990's. President Bush gave a speech about manufacturing...

Posted by DeLong at 11:01 PM

September 11, 2003
Forecasts of U.S. Growth

Martin Baily of the Institute for International Economics cannot believe that the U.S. economy's real GDP can grow at a rate of 4% per year without generating lots of jobs: News Release: Economic Recovery To Be Strong And Globalized: ...projecting US growth at better than 4 percent through at least mid-2004 with a strong possibility of considerably better results for a quarter or two, and Baily expects the rapid growth to start creating substantial numbers of new US jobs in the fourth quarter of this year... I agree with him: I can't believe it either. I can't believe that the U.S. economy is averaging 4 percent growth this spring and summer--which it is--with rapidly-falling employment numbers. It's definitely something new and strange......

Posted by DeLong at 07:43 PM

China's Exchange Rate

Morris Goldstein and Nicholas Larby set out Op-ed: A Modest Proposal for China's Renminbi: ...A medium-size revaluation of the currency may not be as "sexy" as a large revaluation or no revaluation but it rests on a firmer foundation and is more consistent with China's long-term interest. Those arguing for a large revaluation of the renminbi--35 per cent or more--sometimes confuse bilateral trade balances with overall current account balances. While China is running a large (Dollars 100bn in 2002) bilateral trade surplus with the US, its trade balance with the rest of the world is in deficit, at Dollars 75bn (Pounds 47bn). Bilateral trade balances are especially misleading in this case because China processes goods previously exported to industrial countries by other emerging Asian economies... They believe China should undergo a modest revaluation of its currency for two reasons: first, it will help China avoid financial instability; second, it will do the United States--which does need to bring its trade back into balance--a favor....

Posted by DeLong at 07:32 PM

September 08, 2003
How Can I Be Out of Money? I Still Have More Checks

Max Sawicky tries his hand at what the unbiased current-Bush-policy forecast of the budget deficit is. As I say at every opportunity, this fiscal year's (and next fiscal year's) deficit is fine: it's the deficit three, five, ten, twenty years down the pike that is really scary--and really damaging. What's really scary to me is that I remember the days when Max Sawicky used to be a full-fledged fundamentalist Keynesian--would say things like that a small deficit wasn't so bad, that the thing to aim for was a stable debt-GDP ratio, that too great a focus on deficit elimination impoverished weak claimants in the present and enriched the well-off of the future, that surpluses exerted a drag on business-cycle performance that it wasn't clear monetary policy could entirely offset. But our collective rendezvous with the reality of the large deficits of our underbriefed President has been enough to drive even Max the Deficit Dove into a state of gibbering terror and deficit hawkishness: Weblog Entry - 09/08/2003: "HOW CAN I BE OUT OF MONEY? I STILL HAVE MORE CHECKS.": Exclusive to MaxSpeak, below are the implications of current Bush policies, what I have elsewhere called the Bushist Baseline. The official...

Posted by DeLong at 04:51 PM

September 07, 2003
Measuring Economic Growth

At least three people have written emails saying: Dear Professor De Long, I am curious about your reaction to the following article published in the FT on Friday 9/5. The author makes the point that a big fraction of reported GDP growth is an accounting mirage due to using "hedonic pricing". Could you please discuss this. Thanks a lot. The article is by Kurt Richebacher, former chief economist for the Dresdner Bank. His main point is: Investment in computers soared by $38.4bn, or 12 per cent, from $319.1bn to $357.5bn. The trouble is that much of this boom-like increase in computer investment never occurred. The apparent surge is a consequence of the hedonic deflator that US government statisticians use when measuring computer output and investment... pricing produced $32.1bn of GDP in real terms, about 43.9 per cent of the reported second-quarter GDP increase of $73.1bn. In its absence, GDP would have grown a mere $41bn, implying a growth rate of 1.68 per cent. The important thing about hedonic pricing is that it measures dollars that nobody pays and nobody receives... Briefly, I think Richebacher is mistaken: unless I am very confused, increased demand by businesses for computers accounted for only...

Posted by DeLong at 08:44 AM

September 05, 2003
Fear of Bad Employment Reports

This morning's employment report reduces Doug Henwood to a state of gibbering terror: Doug Henwood: This morning's U.S. employment report sucked. The survey of employers showed a loss of 93,000 jobs, when flat to slightly up was a reasonable expectation. We've now had seven consecutive months of job loss, something we've never seen outside a recession. The workweek was short and almost every industrial sector shed jobs. The survey of households showed a shrinkage in the labor force - the entire reason for the decline in unemployment from 6.2% to 6.1%. The share of the adult population working was flat, and remains at a low for this cycle. People are buying stuff, but it's not with their paychecks - it's all tax refunds and mortgage refinancing. If the job market doesn't recover soon, we're in trouble. What Doug fears is that sometime soon households will change their states of mind: they will think that the risk of losing and then being without a job, or being unable to find anything other than a crappy job, is too high; and thus that they need to cut back on their spending significantly in order to build up their buffer stocks of savings...

Posted by DeLong at 09:41 AM

September 03, 2003
Econ 101b: Fall 2003: The Erosion of Okun's Law

We used to have considerable confidence in Okun's law: that an extra one percentage point rise (or fall) in the unemployment rate over a year would reduce (or boost) that real GDP growth by an extra 2.5 percent over that year because a rising (or falling) unemployment rate would also be accompanied by a falling (rising) share of the population in the labor force and by falling (rapidly rising) productivity. Productivity would fall when the unemployment rate rose for two reasons: first, even when factories are not running at full capacity they still incur substantial setup and maintenance costs; second, even when there isn't enough work for them to do firms would rather hold onto skilled workers than watch them drift away and have to pay to train their replacements the next time the wheel of the business cycle turns. Things have been different, however, in this recession (and to a lesser extent in the preceding early-1990s recession. The standard relationship between output growth and hours worked has gone substantially awry. See that branch poking out of the scatter diagram on the left side? That's the most recent data. (The smaller twig pointing out below and to the left...

Posted by DeLong at 04:22 PM

Erica Groshen and Simon Potter: Structural Change and the Jobless Recovery

UPDATE: Let us now curse and keelhaul the webmasters of the Federal Reserve Bank of San Francisco. They have broken their links. Erica and Simon's article is now here. These aren't my thoughts--I have no informed contribution to make here--but they are very, very interesting ones. Erica Groshen and Simon Potter of the New York Fed are doing serious work on why the last two recessions have been followed by "jobless recoveries." Has Structural Change Contributed to a Jobless Recovery? - Federal Reserve Bank of New York: The sluggishness of payroll growth during the 1991-92 and current recoveries stands in sharp contrast to the vigorous rebound in employment during earlier recoveries (Chart 1). To be sure, these earlier recoveries had rocky moments, with occasional jobless intervals. At the start of any recovery, many employers will delay hires or recalls for a time to be certain that the increase in demand will continue. Nevertheless, although the job market resurgence in the past may often have lagged the output recovery by one quarter, only during the two most recent recoveries has the divergence between job and output growth persisted for a longer period. The divergent paths of output and employment in 1991-92 and...

Posted by DeLong at 07:10 AM

September 02, 2003
Inflation Targeting

Alan Greenspan doesn't want his elbow jiggled by demands that he explain why this quarter's inflation rate is different from the previously-announced target, or why current monetary policy is setting interest rates at a level other than that given by a relatively-mechanistic Taylor rule. Steve Cecchetti, Brandeis professor and ex-New York Fed research chief, agrees with Greenspan's worries--but would like a medium-term announced inflation target anyway: Home US: ...There are two big pitfalls in the implementation of inflation targeting, both arising from formulaic implementation. One involves the technicalities of how interest rates are set. If you were to survey the academic literature that provides the conceptual underpinning for inflation targeting, you would find that most economists are discussing something called "inflation-forecast targeting". It is logical that policymakers should adjust interest rates in response to forecast deviations from the objective. That means having accurate forecasts as well as a quantitative estimate of the impact of interest rate changes on these forecasts. Getting these means building and using sophisticated models of a country's economy. This is an challenging task even for the smartest model-builders in the world. The Fed does an adequate job but employs hundreds of highly trained economists to...

Posted by DeLong at 08:42 PM

Raising the Stakes

Eswar Prasad and Ken Rogoff say that globalization raises the stakes: countries that are open to the world economy can benefit substantially if they have good economic policies, but will undergo more frequent crises and deeper depressions if their policies are wrong: "...pegged exchange rate regimes, unsound domestic macroeconomic policies and poorly supervised financial markets..." Home US: First, does financial integration by itself help a developing country to achieve higher living standards through faster growth? Interestingly, the more financially integrated developing economies do seem to have achieved higher per capita incomes than others. However, it becomes difficult to make a convincing connection between financial integration and economic growth once other factors, such as trade flows and political stability, are taken into account. The second question was whether financial integration helps a country to avoid macroeconomic instability. We found that financially integrated developing economies have in some respects been subject to greater instability than other developing countries. This result may not seem surprising, in view of recent financial crises. But it is still interesting that it is precisely those countries that made the effort to become financially integrated that, in general, faced more instability. So, if financial globalisation has not...

Posted by DeLong at 06:32 AM

August 28, 2003
This Is a Very Bad Place to Get Stuck

The Wall Street Journal's David Wessel writes about how markets only work when they are properly structured--when the underlying system and rules of the market game give individual agents the incentive to do the right thing. That does not appear to have been the case in electricity deregulation: - Capital: ...Electricity has its peculiar physical characteristics: Unlike most other commodities, it cannot be stored. Unlike interstate natural-gas pipelines, what happens on one transmission line affects transmission lines and generating plants elsewhere. The transmission network is particularly important, and particularly vulnerable, as Aug. 14 demonstrated. Competition among electricity generators depends on access to a reliable transmission network with clear rules for pricing, access, avoiding congestion and managing it when it occurs. In England and several other countries smaller than the U.S., the transmission system is operated by a single regulated monopoly. In the U.S., the network is managed differently in different regions, and -- it is now almost universally agreed -- remaining regulations discouraged investment in new transmission lines. In the old days, utilities built power lines when they needed them, their regulators assured them of a return on the investment and no one much worried about pricing or other...

Posted by DeLong at 07:24 AM

August 27, 2003
Fast Food-Style Journalism

Ah. A piece of fast food-style journalism--i.e., low-quality, hastily-prepared, and bad for your brain (if not your heart)--from John Kay. There is only one possible response: it is time to break the glass, to sound the siren, to pull out the fire-axe, and to start channelling Milton Friedman: Home US: ...there has been intensive lobbying by smaller merchants. It is almost impossible today to create new shopping centres on greenfield sites. But these self-serving arguments have been successful not because their proponents made donations to political action committees but because many French people are sympathetic to the cause. They fear the marché municipal might disappear. I doubt if there is much justification for these fears. There are three supermarkets within a quarter of a mile of the market, which stock the same categories of goods, mostly of lower quality and at lower prices. On the outskirts of town is a much larger store with extensive parking. A 20-minute drive will take you to a Carrefour with more than 100,000 square feet of retail space and a US-style mall. In the face of this competition, the marché municipal and another daily market a mile away seem to be doing fine....

Posted by DeLong at 09:57 PM

The IMF Is Unhappy

John F. Irons notes that the advance word is that the IMF is extremely unhappy with the feckless Bush Administration's macroeconomic policies: Blog - IMF doesn't like the US budget situation. IMF chides U.S. over budget - Aug. 27, 2003 IMF slams U.S. over budget Global lending agency says government assumptions too optimistic, not doing enough to fix deficits. August 27, 2003: 6:16 AM EDT MILAN, Italy (Reuters) - The International Monetary Fund is set to reproach the United States for being too optimistic in its assumptions on government spending and revenues and lacking a coherent budget plan, according to a summary of a draft report. The report "criticizes the U.S. government's excessively optimistic assumptions regarding the development of overall state spending and revenues and the lack of a medium-term concept to consolidate budgets and reform the social insurance system," the draft said. [...] News of the IMF report comes a day after a congressional budget agency forecast a federal budget deficit of $480 billion in 2004, a record shortfall... I remember then-IMF head Michel Camdessus's meeting with then-U.S. Treasury Secretary Lloyd Bentsen in the fall of 1993, where Camdessus said that he was very happy to finally be...

Posted by DeLong at 08:59 PM

August 26, 2003
1100 Words on Service-Sector Outsourcing

We economists don't spend enough time pushing the political arguments for freeing-up trade and accelerating the development of poorer countries. We feel that the economic case alone is so strong that that should be sufficient. / Comment & analysis: ...On the political side, does anybody really want Indians and Chinese in 50 years' time - the 3bn educated citizens of what will then be industrialised economies and proud countries - to remember that western Europe and North America took whatever steps they could to slow Indian and Chinese economic growth in the first half of the 21st century? Democratic politics will produce strong pressures to compensate and assist those who work in industries that will be battered by foreign competition. But, please, let the compensation and assistance take the form of social insurance rather than trade protection....

Posted by DeLong at 09:18 PM

August 21, 2003
In Memory of Rudi Dorbusch

The late Rudi Dornbusch was supposed to give the AEA's Richard T. Ely lecture last winter. Stanley Fischer gave it instead. Here the Economist summarizes on the main message that Stan had to convey: | Economics focus: Begin with the top chart. Each point represents a country. The vertical axis shows average annual growth of income per head between 1980 and 2000; the horizontal axis shows the level of income per head in 1980. Note in passing that the countries of sub-Saharan Africa are distinguished from the others: they are clustered in the lower left-hand corner of the diagram, representing both very low incomes and very slow growth. In the last 20 years of the 20th century, globalisation, however you measure it, was advancing rapidly. Globalisation, according to its advocates, helps poor countries to catch up. So what one would wish this chart to show is a marked downward-sloping pattern of points: saying, in effect, the poorer any given country, the faster its growth. The chart shows no such pattern. In fact, a line of best fit through the scatter of points (as shown) slopes slightly upwards, implying that, on average, the rich are getting richer faster than the...

Posted by DeLong at 09:37 AM

August 20, 2003
Productivity Growth: America vs. Europe

Robert Gordon argues that a big chunk of the miraculous growth in U.S. productivity--and the bulk of the difference between the U.S. and the European experience--comes from the interaction of high investment in IT in the U.S. and the economic freedom to reconfigure retail and sell goods in high-volume from newly-built "big box" automobile-accessible stores: Home US: ...Where does Europe fit in? The data show that Europe's performance is worst in those industries that are heavy users of ICT, especially retail trade, which just happens to be where the US's productivity showing is strongest. America's retail productivity performance has all been achieved in stores newly built since 1990, not in existing stores. The new stores are the "big boxes" such as Wal-Mart, Home Depot and Best Buy, large new buildings set up on greenfield sites at interstate highway junctions, in suburbs and, increasingly, in inner cities. As these new stores reap the rewards of their size, openness and accessibility and drive smaller stores out of business, they bolster the average productivity of the US retail sector as a whole. While countries differ, Europe has many ways of stifling modern retailing, from green belts and land-use restrictions to laws that...

Posted by DeLong at 08:23 AM

August 19, 2003
Outsourcing Our Future?

Dan Gillmor and others are worried that we are outsourcing our future. Let's begin by clearing away some underbrush. First of all, the number of jobs in the United States is not set by what happens on the sea lanes--on what exports and imports the container ships carry from port to port. The number of jobs is set in the Eccles Building, by the Federal Reserve, which tries to hit the sweet spot: high enough demand to produce effective full employment, without so much demand that vacancies become so abundant as to lead inflation to run away. Sometimes the Federal Reserve does a good job and is lucky, and we have full employment with price stability. Other times the Federal Reserve is unskillful or unlucky, and we have accelerating inflation or high unemployment. It is certainly true that what happens in international trade affects employment in America. But the Federal Reserve can and does offset and neutralize impacts of trade that push employment away from where the Federal Reserve thinks the sweet spot of full employment is. So what, then, is the impact on the American economy when Singapore educates its people to become competent network developers, or India educates...

Posted by DeLong at 06:25 PM

William Saletan Is Unbalanced and Unfair

Why oh why do we have such a lousy press corps? Here we have William Saletan and Ben Jacobs sneering at Dick Gephardt for being proud of his role in the 1993 deficit-reduction package: The Best of Dick Gephardt - The bravest thing he ever did. By William Saletan and Ben Jacobs ...Whether that [1993 Clinton] budget caused the expansion, boosted home ownership, lowered inflation, and created millions of jobs is far more dubious. According to figures released by the Office of Management and Budget in 1999, the recovery from the 1990 recession started in April 1991, nearly two years before Clinton took office. Furthermore, the Dow Jones Industrial Average didn't begin skyrocketing until Republicans captured Congress in 1994. The Dow gained just 538 points during the two years in which Clinton enjoyed a Democratic Congress. The Dow then soared nearly 7,000 points in the six years during which Clinton faced a Republican Congress. And the nation's Gross Domestic Product didn't starting recording annual increases of 4 percent until 1996. Where to start? Let's work backwards, with the claim that the 1993 budget deal did not contribute to rapid growth in the late 1990s because GDP growth did not cross 4% per year...

Posted by DeLong at 08:44 AM

August 15, 2003
Output and Hours Since 1960

Some more two-year centered moving averages since 1960: this time it's nonfarm business real output and nonfarm business total hours worked. Once again (and unsurprisingly) we are outside the bounds of previous experience in the modern American economy: The little twig on the left side of the figure shows the moving-average data for 2000-2002. Never in any two-year period in the modern American economy's experience have hours fallen so fast. Given what has happened to hours in the recent past, the standard historical pattern would lead you to expect output to be falling at 2.5% per year or more--and you would expect productivity growth to be negative, not positive and in excess of 4% per year. We are indeed in uncharted waters. Not that we should mind--extraordinarily rapid productivity growth is a wonderful gift. But it does pose different problems for economic management to solve than the ones we had gotten used to......

Posted by DeLong at 10:43 AM

More Good GDP (and Productivity) News About the Second Quarter

News about the economy in the spring released since the initial estimate of second-quarter GDP growth tells us that the second-quarter growth rate is likely to be revised upward significantly--from a 2.4% annual growth rate to perhaps a 3.0% annual growth rate. This is excellent news for production and productivity: Analysts see U.S. 2nd quarter GDP upward revision: Merchandise trade data out on Thursday showed exports rose a healthy 2.4 percent in June, while in real terms, which is what matters for gross domestic product, the trade deficit narrowed sharply to $47.23 billion from $50.04 billion in May. The [trade] deficit was much smaller than that assumed by statisticians in the advance measure of GDP released on July 31, suggesting trade subtracted less from growth than the 1.56 percentage points initially estimated. The trade news comes hot on the heels of significant upward revisions to retail sales figures for both May and June. On Wednesday the Commerce Department unexpectedly upped its June estimate of sales to a rise of 0.9 percent from 0.5 percent, while May now shows a gain of 0.5 percent when it was flat before. The sudden discovery that consumers spent a lot more than first...

Posted by DeLong at 09:54 AM

August 09, 2003
Productivity Growth Trends

The Economist focuses on this past quarter's productivity growth number, without taking a look at the larger picture: Output has dipped and climbed, but has the trend rate of growth risen? Economists are still far from a consensus.... When the productivity figures did pick up in the second half of the 1990s, all of the assorted gurus, bulls and nerds claimed vindication. Even Mr Greenspan became a cheerleader for the new economy, albeit a rather taciturn and oblique one. The cheers faded as the stockmarket bubble burst and the economy went into recession. But the collapse in share prices does not itself disprove the notion of a new economy. The bears can be right without the nerds being wrong, because technological revolutions do not always pay off for the people who bought stocks in them. The railroad investors of the late 19th century, for example, made no money from their stakes in America's rail companies, but most agree that the economy as a whole benefited. Productivity gains can be real, without showing up in your dividend payments. The gains might go to workers, in the form of higher wages, or they might show up in the creation of new...

Posted by DeLong at 08:48 PM

July 29, 2003
Blithe Unconcern

DeLong tries to figure out why the Bush Administration makes the economic policy decisions it does: Home US: A phrase that comes to mind when looking at America's pattern of business cycle management is "blithe unconcern", writes Brad Delong, professor of the University of California......

Posted by DeLong at 05:28 PM

The Return of the Budget Deficit

John F. Irons interprets the return of budget deficits....

Posted by DeLong at 04:40 PM

July 27, 2003
The Long-Term Budget Outlook

Brookings's Bill Gale talks turkey about the long-term fiscal-policy mess George W. Bush and company have gotten us into: The Brookings Institution: ...My testimony focuses on five main points. First, the conventional wisdom is accurate: The United States faces substantial projected fiscal deficits in the coming decades. A big part of the reason why is that increasing life spans, the retirement of the baby boom generation, and changes in health care technology will generate persistent increases in spending on social security, medicare and medicaid that far outstrip the rate of growth of the economy. Second, there is another big part of the problem: namely, the sunsets that are in the tax code. If all of those sunsets were removed, revenue would fall by 2.4 percent of GDP on a permanent basis. If, in addition, the alternative minimum tax is reduced so that only 3 percent of taxpayers stayed on it--about the current level--revenues would fall by about 2.7 percent of GDP. These prospective revenue losses are huge. They are more than three times as large as the 75-year actuarial deficit in social security, expressed as a share of GDP. They exceed the 75-year actuarial deficit in the Social Security and...

Posted by DeLong at 07:58 PM

July 25, 2003
Bernanke Speech on Monetary Policy in a Low Inflation Environment

Federal Reserve Governor Ben Bernanke is thinking about Federal Reserve policy in a very low inflation environment. He sees the Federal Reserve's principal weak point as a possible inability to convince private market participants that the Federal Reserve intends to keep short-term rates as low for as long as it in fact intends to. Thus there seems to be considerable convergence between Bernanke's current position and Krugman's view of the underlying causes of liquidity traps. FRB: Speech, Bernanke--An unwelcome fall in inflation?--July 23, 2003: ...Attaining price stability is an important accomplishment, one of which my predecessors on the Federal Open Market Committee (FOMC) can justifiably be proud. But this development has also forced the Federal Reserve--as well as the public--to reorient its thinking about inflation in a fundamental way. After a long period in which the desired direction for inflation was always downward, we are now in a situation in which risks to the inflation rate can be either upward, toward excessive inflation, or downward, toward too-low inflation or deflation. As many of you are aware, the Federal Reserve officially recognized this new situation in its balance-of-risks statement issued at the close of the FOMC meeting this past May 6....

Posted by DeLong at 09:21 AM

July 22, 2003
Panic in the Bond Market?

Morgan Stanley's Stephen Roach sees a bond-market panic driven by depressed "animal spirits" on the part of bond traders. The Federal Reserve needs to keep long-term interest rates low to spur investment and recovery. How it can do this if it is indeed the case that long-term bond interest rates are now being set by panicked traders rather than forward-looking economists is a mystery: Morgan Stanley: ...There are a number of alternative explanations to this dramatic sell-off in the bond market.  There are those, of course, who claim that signs of incipient economic recovery have turned the bond market inside out.  While I'm hardly objective on that point, even the diehard growth optimists concede that the evidence remains mixed at this point and that the vigorous recovery call is still a forecast (see Dick Berner’s July 18 dispatch, "Recovery Signs").  Others have argued that the rapidly deteriorating federal budget deficit is the culprit, sparked by the administration’s midyear confession that the budget shortfall is likely to hit $455 billion in the current fiscal year.  While I would be the last to minimize the significance of this development, it hardly qualifies as the singular surprise that can explain the bond market’s...

Posted by DeLong at 12:53 PM

July 18, 2003
The Deficit Outlook

Paul Krugman does not believe that the Bush administration plans to reduce the deficit as the economy recovers from its current jobless recovery. Given the Bush administration's past history, it is very hard to argue against him. Only a complete personnel turnover inside the White House domestic staff could possibly generate confidence that the deficit will go down and not up as the economy grows. Passing It Along: ...There's no mystery about why the administration's budget projections have borne so little resemblance to reality: realistic budget numbers would have undermined the case for tax cuts. So budget analysts were pressured to high-ball estimates of future revenues and low-ball estimates of future expenditures. Any resemblance to the way the threat from Iraq was exaggerated is no coincidence at all. And just as some people argue that the war was justified even though it was sold on false pretenses, some say that the biggest budget deficit in history is justified even though the administration got us here with cooked numbers. Some point out that Ronald Reagan ran even bigger deficits as a share of G.D.P. But they hope people won't remember that in the face of those deficits, Mr. Reagan raised taxes,...

Posted by DeLong at 01:53 PM

June 27, 2003
Budget Blues

Depressing read of the day. The fact that the Bush Administration's only major policy affecting long-run economic growth is to try to reduce it by crowding out capital formation and investment only adds to the long-run gloom: Tax Policy Center | A Project of the Urban Institute & the Brookings Institution: Auerbach, Gale, Orszag, and Potter, "Budget Blues": ...The government's ability to run a sustainable fiscal policy, though, depends on the provision of appropriate information. More accurate budget figures would give policymakers and the public the best available information to guide policy choices. For example, when President George W. Bush came into office, the official projected ten-year surplus was $5.6 trillion?more than 4 percent of the economy?over the ensuing ten years. More realistic estimates, however, suggested that, even before considering the president's tax cut, the ten-year surplus was only about $1 trillion and was substantially uncertain, and longer-term projections showed a significant fiscal shortfall.3 Nevertheless, the public debate that led to the $1.35 trillion tax cut in 2001 ignored the long-term figures and focused on the faulty, official ten-year projections. To be sure, some would argue that the tax cut was the right choice under any budget situation. At the...

Posted by DeLong at 11:46 AM

Out of Gas

Stephen Roach meditates on the gap between what the Federal Reserve wants the American economy to do--grow at 4 percent per year for a couple of years or so--and the tools at the Federal Reserve's disposal: Morgan Stanley: ...Since the equity bubble popped in early 2000, the US economy has been on an anemic 1.7% annualized growth path. That includes a mild recession in the first three quarters of 2001 and an unusually subpar recovery in the subsequent seven quarters. Significantly, the post-bubble growth pace has been well below America?s productivity-driven potential growth rate that most put in the 3.25% to 3.75% zone. The result is the emergence of a wide margin of slack between aggregate supply and demand. For a US economy that entered this post-bubble business cycle at a 2.25% inflation rate, this slack has been sufficient to push the US dangerously close to the deflation threshold; in the first five months of 2003, annualized core CPI inflation has averaged just 1.2%. Little wonder the most common complaint heard from US businesses pertains to the lack of pricing leverage. In this context, the Fed?s goal is simple -- to get the economic growth rate back above its long...

Posted by DeLong at 06:17 AM

June 25, 2003
Bill Gale on JGTRRA

The Brookings Institution's Bill Gale on the economic effects of the recent Bush tax cut: The Brookings Institution: Thank you for inviting me to testify at this hearing on the effects of the Job and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) on jobs and growth. My testimony is divided into a summary of the major conclusions and the analysis supporting those conclusions. My principal conclusions are as follows: Taxes and short-term stimulus: In the short run, in an economy operating with excess capacity, increases in aggregate demand can raise output and income even without raising the capital stock. JGTRRA and short-term stimulus: JGTRRA will boost aggregate demand in the short term and thereby generate higher short-term levels of income and employment than would occur if no policy were enacted. But this is a very minor accomplishment. Almost any increase in spending or cut in taxes would boost a sluggish economy. JGTRRA was not the only policy option: policy makers could have provided more progressive tax cuts, increased federal spending or transfers to the states, and extension of unemployment benefits. In comparison to those other policies, JGTRRA is a poor way to stimulate the economy in the short-term: the...

Posted by DeLong at 05:04 PM

June 23, 2003
It Depends on What a Recession Is

The NBER's Business Cycle Dating Committee continues to hesitate. But it is not the case that more time will make the state of the U.S. economy between the start of 2002 and today clearer. The state of the U.S. economy is clear: slow growth in demand and output accompanied by rapid underlying productivity growth and so declining employment. What is unclear is what the NBER thinks a "recession" is. More time may be needed, but not because more time would shed better light on the state of the economy--rather, more time seems to be needed for the Business Cycle Dating Committee to think through what its system of categories really is. The NBER's Recession Dating Procedure: According to the most recent data, the U.S. economy continues to experience growth in income and output but employment continues to decline. Because of the divergent behavior of various indicators, the NBER's Business Cycle Dating Committee believes that additional time is needed before interpreting the movements of the economy over the past two years......

Posted by DeLong at 10:35 AM

June 09, 2003
PY Is Not Proportional to M

Edward Hugh finds the Financial Times's Simon London having lunch with Milton Friedman somewhere on the road to Damascus: BONOBO LAND: The Financial Times Simon London has had lunch with Milton Friedmann, and discovers he has changed his mind about targeting the quantity of money, which is, as Stephen Roach notes ironic at a time when Bernanke and company would have things otherwise: 'Hold on to your hats and prepare to be amazed: Milton Friedman has changed his mind. "The use of quantity of money as a target has not been a success," concedes the grand old man of conservative economics. "I'm not sure I would as of today push it as hard as I once did." Granted, this is hardly a conversion of Damascene significance. But, heck, it's a start.' To be fair to Uncle Milton, his focus on having a central bank set and hit its targets for monetary aggregates always had as much to do with building central bank credibility--demonstrating that it would keep the promises it made, and that it was serious about constraining the growth of nominal variables, and in versions like his Program for Monetary Stability the recommendation to target M was accompanied by...

Posted by DeLong at 06:49 PM

June 05, 2003
Gains From International Trade and Investment

An Irish-Arizonian-Australian cross-disciplinary alliance of Kieran Healy and John Quiggin is thinking about Pierre-Olivier Gourinchas and Olivier Jeanne's brand-new "The Elusive Benefits of International Financial Integration"--the conclusion of which is that in standard neoclassical models freeing up capital flows across nations has the capability to boost economic welfare by an amount on the order of magnitude of one percent: John Quiggin: (Small) gains from trade: (Small) gains from trade: Kieran Healy links to a paper by Pierre-Olivier Gourinchas and the missing-from-the-web Olivier Jeanne in which a calibrated growth accounting model is used to show that the gains from unrestricted capital mobility are likely to be of the order of 1 per cent of GDP. Gains from risk sharing aren't mentioned but other papers are cited to say that these are of a similar magnitude. Those who listen to the general pronouncements of economists might be surprised by the modest size of the estimated gains. But for those who have looked at similar exercises in the past there is no surprise here. One of the better-kept secrets of economics is the fact that most studies suggest that the replacement of a typical high-tariff regime (say Australia's in the 1960s) will yield...

Posted by DeLong at 07:09 AM

June 02, 2003
A Stronger Forthcoming Rebound in Investment Spending?

Morgan Stanley's Richard Berner turns pessimistically optimistic about the recovery: Morgan Stanley: Incoming data suggest that manufacturing is staging a rebound, following a slide netting more than 2% since last August.  Is the recovery coming faster than we expected a couple of weeks ago?  Certainly several positive fundamentals are in place.  Among them: Declining energy quotes, easier financial conditions, increased fiscal stimulus and reduced uncertainty, all of which should boost demand.  Moreover, a long spending drought has built some pent-up demand in Industrial America.  But it's still a two-tier manufacturing economy, with technology reviving and the rest of manufacturing struggling.  Importantly, manufacturers still face two key cyclical obstacles in a tepid global economy and still-high natural gas prices, while high legacy health and pension costs and competition from China represent key secular challenges. There are certainly glimmers of hope in very recent manufacturing data.  Purchasing managers from Chicago and Milwaukee reported a sharp improvement in both orders and overall business conditions in May over April, and their New York brethren announced that manufacturing business conditions stayed at a high level.  It still looks like a two-tier manufacturing economy, however (see "The Two-Tier Economy Revisited," Global Economic Forum, May 16, 2003). ...

Posted by DeLong at 10:23 AM

May 28, 2003
Finding Where the Numbers Are Crunched

Paul Krugman praises the Center on Budget and Policy Priorities and the Urban-Brookings Tax Policy Center: Well, here's how to become an instant fiscal expert. Seriously, these sources are must reading for anyone interested in government policy. First is the  Center on Budget and Policy Priorities . It's staffed largely by former Congressional aides. Yes, it's Democratic in orientation - but while that affects its choice of subjects, the statistical work is absolutely impeccable; there is nothing at all like it on the right, or anywhere else. Their recent  analysis  of the declining share of federal revenue in GDP was central to my last column. If you care about these things, check CBPP's site regularly for updates. Second is the  Urban-Brookings Tax Policy Center , which is particularly useful for distributional analyses - whose taxes get cut. Again, the orientation is Democratic - Republicans think that it's evil even to ask such questions - but the work is impeccable. Now you, too, can do the math....

Posted by DeLong at 08:18 PM

May 27, 2003
The G-7 Process

Yale's Jeffrey Garten, he no like the G-7: / Comment & analysis: ...These summit meetings are a far cry from what was intended when they were conceived in 1975. At the time, I was a young official working for Henry Kissinger, then secretary of state. I recall discussions about the importance of heads of state getting together in intimate, informal circumstances to build genuine rapport. The bureaucracy was to be kept to an absolute minimum. The objective was to manage the interdependence of G7 countries and for them to co-ordinate important policies in both their own collective interest and that of the world at large. Today, these meetings are overrun by large bureaucratic staffs and have become gargantuan media extravaganzas. Except for sleep-inducing communiqués, G7 members barely deal with critical economic reforms within their own countries - the very policies that matter most to the global economy. Instead, they offer plenty of advice on what non-member countries should do. The group also likes to deflect attention from its inability to make the tough economic choices at home by loading the agenda with the political issues of the day. The non- proliferation of weapons and illegal traffic in narcotics are...

Posted by DeLong at 11:36 AM

Note: Greenspan's Views as of May 2003

Greenspan's views, May 2003... Testimony of Chairman Alan Greenspan The economic outlook Before the Joint Economic Committee, U.S. Congress May 21, 2003 Mr. Chairman, I appreciate the opportunity to testify before the Joint Economic Committee. As you will recall, when I appeared here last November, I emphasized the extraordinary resilience manifested by the United States economy in recent years--the cumulative result of increased flexibility over the past quarter century. Since the middle of 2000, our economy has withstood serious blows: a significant decline in equity prices, a substantial fall in capital spending, the terrorist attacks of September 11, confidence-debilitating revelations of corporate malfeasance, and wars in Afghanistan and Iraq. Any combination of these shocks would arguably have induced a severe economic contraction two or three decades ago. Yet remarkably, over the past three years, activity has expanded, on balance--an outcome offering clear evidence of a flexible, more resilient, economic system. Once again this year, our economy has struggled to surmount new obstacles. As the tensions with Iraq increased early in 2003, uncertainties surrounding a possible war contributed to a softening in economic activity. Oil prices moved up close to $40 a barrel in February, stock prices tested their lows of...

Posted by DeLong at 10:44 AM

May 24, 2003
A Question About the Zero Bound on Nominal Interest Rates

Kevin Drum asks what he describes as a "really dumb question": CalPundit: Interest Rates: Now, I know this is a really dumb question (and yes, contrary to popular wisdom, there is such a thing as a dumb question), but why is this so? Why can't the Fed have negative interest rates? Walk up to the discount window, borrow a million dollars, and next month when it comes due you only have to pay back $900,000. Banks would then have an incentive to loan out this money at a negative rate too. As long as their rate was less negative than the Feds, they'd make money on the deal... The problem comes at the second stage of your thought experiment. Yes, the Fed can loan money at negative nominal interest rates to banks. But the banks then have an incentive to simply put the cash in their vaults and keep it there. They could loan it out at negative interest rates and make money (as long as there was a spread), but they would make more money if they did not lend it out and just squirreled it away. To break this greater incentive for banks not to squirrel the cash...

Posted by DeLong at 10:46 AM

Fear of a Quagmire

The New York Times finally gives Paul Krugman enough space on the op-ed page for him to talk about liquidity traps and the current state of the business cycle: Fear of a Quagmire? The Fed still has some tricks up its sleeve. Now would be a very good time to announce an inflation target. But it's also clear that the Fed could use some help, at home and abroad. Alas, it's not getting that help. The Fed's European counterpart, the European Central Bank, has been far less aggressive in cutting rates. There are economic, institutional and psychological reasons for this passivity, but the central bank's immobility is one main reason why Germany seems set to follow in Japan's footsteps. European governments aren't much help, either. Bound by the "stability pact," which limits the size of the deficits they are allowed to run, they have been cutting expenditures and raising taxes even as their economies falter. The Bush administration is, of course, notably unconcerned about deficits. Aren't the tax cuts in the pipeline exactly what the economy needs? Alas, no. Despite their huge size -- if you ignore the gimmicks, the latest round will cost at least $800 billion over the...

Posted by DeLong at 09:34 AM

May 12, 2003
Paul Krugman's "Thinking About the Liquidity Trap"

Paul Krugman's "Thinking About the Liquidity Trap": Thinking about the liquidity trap: We live in the Age of the Central Banker - an era in which Greenspan, Duisenberg, and Hayami are household words, in which monetary policy is generally believed to be so effective that it cannot safely be left in the hands of politicians who might use it to their advantage. Through much of the world, quasi-independent central banks are now entrusted with the job of steering economies between the rocks of inflation and the whirlpool of deflation. Their judgement is often questioned, but their power is not. It is therefore ironic as well as unnerving that precisely at this moment, when we have all become sort-of monetarists, the long-scorned Keynesian challenge to monetary policy - the claim that it is ineffective at recession-fighting, because you can?t push on a string - has reemerged as a real issue. So far only Japan has actually found itself in liquidity-trap conditions, but if it has happened once it can happen again, and if it can happen here it presumably can happen elsewhere. So even if Japan does eventually emerge from its slump, the question of how it became trapped and what...

Posted by DeLong at 07:28 AM

May 07, 2003
Why Oh Why Can't We Have a Competent Executive Branch? Part MCIX

Bruce Bartlett (one of the few sane people in Washington, DC, as evidenced by his decision to live in beautiful Great Falls, Virginia) has switched from believing that Job #1 is to reform and reduce the taxation of income from capital in order to boost long-run economic growth to believing that Job #1 is to boost demand and stimulate the economy over the next two years. Unfortunately, he says, as the economic news making the case for immediate stimulus stronger has dribbled in over the past half year, "the White House [which] recognizes that the political and economic landscape has changed... has simply revised its rhetoric. Now, instead of making the correct argument for its dividend plan -- that it will raise productivity, growth and incomes over time -- the White House talks only about jobs, jobs, jobs. The problem is that the dividend plan probably won't create many new jobs and very few of those will come in the short run." The Thomas option -- The Washington Times: May 7, 2003 The Thomas option Bruce Bartlett      By tomorrow , both the House Ways and Means Committee and the Senate Finance Committee will have completed mark-up of a major tax...

Posted by DeLong at 09:52 AM

May 06, 2003
Kevin Drum Needs to Be Told What to Think

Kevin Drum needs to be told what to think about Mitch Daniels's resignation from the post of Director of the Office of Management and Budget. I will oblige. These are the party-line talking points: The principal task of the Director of the Office of Management and Budget is to tell people "no": he or she needs to tell agencies "no" when they want to expand their programs beyond reason; he or she needs to tell White House political operatives "no" when they want to offer tax cuts beyond reason. A successful OMB Director makes current and projected future federal budget deficits shrink (or current and projected future surpluses expand). Given what has happened to the current and projected future federal budget balances under his tenure, Mitch Daniels may well be the least successful OMB Director in American history. (He may be the second least successful--David Stockman may beat him out for the "worst" title: it's a matter of opinion. You may argue that Mitch Daniels faced a uniquely bad situation when he became OMB Director: a president too lazy to grasp the issues, a senior White House staff that did not understand that, like, bad, like, economic policy could, like,...

Posted by DeLong at 01:19 PM

May 04, 2003
Notes: Budget Deficits and Economic Growth Once Again

Bill Gale and Peter Orszag continue their series of surveys of the evidence on the effects of budget deficits on long-run growth. From my perspective, the most interesting thing is how few people disagree with them. Whether it's Glenn Hubbard and company correcting a Dow-Jones wire article implying that their CEA estimates were orders of magnitude lower than Gale and Orszag's, the predictions of the Macroeconomic Associates model at the core of CEA analytical work, the estimates of the CBO presided over by former Bush CEA Chief Economist Douglas Holtz-Eakin, the approach taken by current CEA Chair-Designate Greg Mankiw's textbooks... All in all, it is a remarkable near-consensus given how extraordinarily strong the political and ideological pressures on economists are: Gale and Orszag: Over the past two years, the long-term budget outlook has deteriorated markedly. Although many policymakers and economists have expressed concern that this fiscal deterioration will reduce future national income and raise interest rates, Bush administration officials and others have publicly denied the existence of such adverse effects. This paper examines the relationship between long-term fiscal discipline and economic performance, with two main results. First, as almost all economic research and standard textbooks suggest, declines in budget surpluses...

Posted by DeLong at 02:13 PM

May 01, 2003
Why Oh Why Can't We Have a Better Press Corps? Part CCXIV

Time to Bang My Head Against the Wall Once Again... Why, oh why, can't we get a better class of journalists? Those who write ABC's The Note claim to be unable to understand Alan Greenspan's nuanced--and consistent--position on fiscal policy issues. They write, "The Note has no idea what Alan Greenspan thinks about the prospects for growth and about the Bush economy, and that is after reading everything he said, and everything ABOUT what he said..." And those who write ABC's The Note are close to the cream of the crop. But it's really not hard to understand Greenspan if you are willing to accept that his positions are always nuanced and that he is almost always polite. In Greenspan's view, expressed yesterday and many times in the past. Greenspan believes that: In the long run the most important thing is to have a balanced federal budget. Having a budget not in deficit is especially important over the next decade because of the forthcoming retirement of the baby-boom generation. But it is always important. Having a budget that is not in deficit is job 1. Once that is taken care of, one can turn to other goals. In the long...

Posted by DeLong at 11:35 AM

April 23, 2003
Fear the Euro

Edward Hugh approvingly quotes from a Marty Feldstein piece in the Financial Times, as Marty tries to warn Gordon Brown and company against taking Britain into the euro zone without thinking very, very, very carefully about it: Financial Times: ...Here are the facts. Germany's gross domestic product rose only 0.5 per cent last year, the lowest of all the leading European countries, and ended the year in decline. Germany also has the lowest inflation rate, just 1.2 per cent. Because the single currency means that all eurozone countries have the same nominal interest rate, Germany's real interest rate is the highest in the eurozone. This is a very dangerous situation in which the high real interest rate weakens the economy and causes inflation to fall further. As the inflation rate falls, the real interest rate rises, creating the potential for a dangerous downward economic spiral. If the German economy were not constrained by the single currency, natural market forces would cause interest rates to decline, thereby boosting all kinds of interest-sensitive spending. Weak demand in Germany would also cause the D-mark to decline relative to its trading partners, boosting exports and helping producers to compete with imports from the rest...

Posted by DeLong at 08:12 PM

April 17, 2003
Uncle Milton

Just spent an hour and a half being interviewed for a documentary about Milton Friedman to air (hopefully) sometime in 2004... Some after-the-fact notes: Friedman... how great an influence on my thought? Let me think who has had more... Smith, Keynes, Summers, Shleifer... I would put Friedman fifth: only four other economist have had a greater influence on how I think... I'm not atypical at Berkeley in finding myself moving under the influence of the intellectual field generated by Milton Friedman--at least, I don't think I am... Friedman as a pragmatic libertarian, perhaps: believing that market failures are atypical, tending to generate profit opportunities and creating institutions to route around them, and that government failure is pervasive--that any expansion of government beyond the classical liberal state is likely to cause more troubles than it solves... Thus a big difference with Arrow, Samuelson, Akerlof, and company: who see market failure as much more common and hard to route around, and democratic governments as much more competent... One problem for us American liberals is certainly that Republican administrations tend to provide excellent demonstrations of Friedman's claim of governmental incompetence/capture/counterproductive behavior--massive government failure that outweighs probable estimates of market failure and creates a...

Posted by DeLong at 12:59 PM

Jeff Madrick on the CBO's Take on Bushonomics

Jeff Madrick this month covers the Congressional Budget Office's take on the growth effects of the Bush economic program. It's a bad business-cycle stabilization plan. It's bad for American long-run economic growth. Jeff Madrick: Economic Scene: ...The textbook Solow model turned out to reduce the rate of growth and raise the deficit substantially. Higher deficits reduced total national savings and therefore undermined capital investment. The growth effects of the other two models were no more encouraging. In fact, the only cases in which the deficits were reduced by as much as 15 percent were when it was assumed that the government would raise taxes in 2014 to stabilize growing debt. The models then concluded that people anticipated this tax increase and saved more now. The higher level of savings resulted in more capital investment in the model, and therefore more growth and lower federal deficits......

Posted by DeLong at 10:08 AM

April 12, 2003
How Deep Is the Current Recession?

The Economic Policy Institute has found a measure according to which the current recession is actually the deepest and most severe of post-WWII recessions. The measure? The percentage by which private employment is below its peak level two years after the recession began: "In the two years since the recession began in March 2001, total payrolls have fallen by 2.1 million and private sector payrolls are down by 2.6 million." This is, of course, only part of the story: the current recession is very shallow insofar as production is concerned (in large part because of the rapid underlying productivity growth trend), moderate as far as the unemployment rate is concerned (in part because lots of people have dropped out of the labor force during this recession), and deep as far as private-sector employment is concerned. Which is the "right" measure? Well, it depends on what you are interested in, of course. A balanced picture of the perhaps-still-ongoing recession needs to comprehend all three......

Posted by DeLong at 09:19 AM

April 10, 2003
Notes: On the Efficient Frontier

William J. Bernstein's Efficient Frontier....

Posted by DeLong at 08:58 PM

April 02, 2003
Faith-Based Budgeting

Bill Gale and Peter Orszag attack the Bush Administration's faith-based budgeting: The Brookings Institution: The Administration does pay lip service to the goal of cutting the deficit, but the words are hollow. The Administration's own estimates show that its tax cuts will generate permanent, increasing deficits and an unsustainable budget path. And, on purely logical grounds, it is difficult to reconcile the Administration's views that the tax cut in 2001 was needed in order to reduce the surplus, and that the same tax cuts, accelerated and made permanent, are needed in 2003 to raise the surplus (reduce the deficit). In light of these glaring inconsistencies, the continual pursuit of large, regressive tax cuts under any and all circumstances can hardly be attributed to logic or any evidence that their effects will resolve the underlying problems. Rather, the Administration's fiscal policy seems to be operating on sheer faith?a political ideology that tax cuts for high-income households are always good. Even faith-based policies, however, can and should be examined on economic criteria. In economic terms, the Administration is taking a massive fiscal gamble that significant tax cuts in the face of large projected deficits are worth the risks. The gamble itself is...

Posted by DeLong at 09:54 AM

March 31, 2003
Latest NBER Business-Cycle Report

The latest NBER business-cycle memo. I think it's time to wander down the hall and ask David and Christie Romer whether the inability of the Committee to decide now--fifteen months after what I see as the recession trough--whether we are in an expansion or not is not sufficient reason to rethink the whole business-cycle methodology that Wesley Clair Mitchell set up for the NBER. The NBER's Recession Dating Procedure: ...According to the most recent data, the U.S. economy continues to experience growth in output and income without growth in employment. Employment, which grew in January after several months' downturn, declined substantially in February. Because employment is still at a low level, it remains our conclusion that additional time is needed to interpret the movements of the economy last year and this year. The NBER's Business Cycle Dating Committee will determine the date of a trough in activity when it concludes that a hypothetical subsequent downturn would be a separate recession, not a continuation of the past one. The trough date will mark the end of the recession. The committee will not issue any judgment about whether the economy has reached a trough until it makes its formal decision on this...

Posted by DeLong at 03:16 PM

Note: State of the Business Cycle

The Economist now projects that the Euro area's economy will grow at 1.1% in 2003, that the Japanese economy will grow at 0.5% per year in 2003, and that the American economy will grow at 2.5% per year in 2003. I don't see why the America number is so high, given that the business-cycle news since January 1 has not been encouraging....

Posted by DeLong at 03:09 PM

March 20, 2003
The Costs of Failing to Put Corporate Reform on the Front Burner

Federal Reserve Bank of New York President William McDonough says that in his judgment the failure to take much more thorough and aggressive action to repair trust in corporate governance and corporate accounts has been and is being very damaging to the American economy. I fear that he is correct. War risk not the only drag on US economy-McDonough: Federal Reserve Bank of New York President William McDonough, citing the damage done to investor and lender confidence by corporate scandals. In a speech to the New York State Bankers Association on Thursday, McDonough said investors continue to doubt the quality of internal governance and external oversight as well as the reliability of the information corporations provide. That contrasts to the Fed's Federal Open Market Committee statement after its policy meeting on Tuesday when it argued that geopolitical uncertainty was the main factor holding back the economy and once that uncertainty lifts, the recovery should pick up. McDonough is currently a voting member of the FOMC but is slated to retire in July. The Fed's next policy meeting is on May 6. McDonough said the rash of serious governance problems was one of the surprises that followed the bursting of...

Posted by DeLong at 10:57 AM

March 17, 2003
How to Be Happy

Richard Layard of the LSE tells us how to be happy in his Public Lectures and Seminars " href="">Lionel Robbins lectures......

Posted by DeLong at 03:13 PM

March 16, 2003
Morris Goldstein Is a Very Good Economist

Morris Goldstein is a very good economist. The latest thing from him to land on my desk is his look at "Debt Sustainability, Brazil, and the IMF." After reflecting on Morris's take, I find myself a little bit less optimistic about Lula and Brazil than I used to be......

Posted by DeLong at 07:41 AM

March 12, 2003
The Wall Street Journal's David Wessel Fears the Deficit

The Wall Street Journal's David Wessel fears the long-run deficits the Bush Administration is planning on running: - Capital: President Bush's economists have one thing right: There are good reasons not to panic about this year's budget deficit or next year's. With the economy still weak, the obvious urgency of improving homeland defenses and the U.S. poised for war with Saddam Hussein, this is no time for austerity. Only Europeans would try shrinking deficits at a time like this. But look beyond the next couple of years, and the fiscal outlook isn't pretty. It'll take more than sprinkling tax cuts over the economy to set things right. Pretending otherwise is like telling your spouse that you can retire early and send the kids to college without saving from weekly paychecks. The problem is that we're headed for a decade of deficits. Start with the new Bush tax cuts (roughly $65 billion a year over the next decade) and the occupation and rebuilding of Iraq (perhaps $20 billion annually for the next few years). Add the cost of the inevitable fix to the unintended middle-class tax increases under the "alternative minimum tax." And make a realistic projection about annually appropriated...

Posted by DeLong at 09:09 PM

Mickey Kaus Is Puzzled

Mickey Kaus is puzzled: Don't Rush Me VI - Time for the grand gesture? By Mickey Kaus: About What Me Worry? I believe whatever Paul Krugman tells me, of course -- he's going to win the Nobel Prize, not me -- but I'm confused. It seems like only two months ago he had me terrified that inflation was going to go down so low it would plunge into negative territory, as in Japan. Now, after reading today's column, I'm worried that the government will decide to "inflate away debt" and "interest rates will soar." ... In other words[u]nless we slide into Japanese-style deflation, there are much higher interest rates in our future.What I don't understand -- and I recognize I may be missing something -- is why we can't end up somewhere in between inflation so low that it's a crisis and inflation so high that it's a crisis. In other words, not in a crisis! If I'm wondering about this, I bet so are many other Krugman readers. Explanation, please! ... Mickey Kaus is puzzled because he doesn't get the fact that that the two different problems that worry Krugman (and me!) operate at different time scales. One--possible deflation--is a...

Posted by DeLong at 07:30 AM

March 10, 2003
Fannie Mae and Freddie Mac Lose Six Percent of Their Market Value

I realize that this is one of Bill Poole's stock lines--that we need to figure out exactly what kind of animals Fannie Mae and Freddie Mac are, and make that clear, and that uncertainty is a potential source of vulnerability. And I realize that Bill Poole repeating one of his stock lines should not knock six percent off the equity value of these GSE's. But this market is really weird. Perhaps this line should be rotated out of the stock speech... : Fed's Poole: Fannie Shocks Could Spread: The agencies' stock prices sank after Poole's comments, with Freddie Mac's shares falling to a new 52-week low and Fannie Mae's clinging just above its one-year low. "Should either firm be rocked by a mistake or by an unforecastable shock, in the absence of robust contingency arrangements the result could be a crisis in U.S. financial markets that would inflict considerable damage on the housing industry and the U.S. economy," Poole said at a conference on the two government-sponsored enterprises, or GSEs. Surprises that destabilize financial markets can and do occur with some frequency, Poole said. Because of the scale of the short-term debt obligations of Fannie Mae and Freddie Mac,...

Posted by DeLong at 07:32 PM

March 04, 2003
Notes: More from Henry Aaron

More from Henry Aaron's February 26 testimony: By its reckless insistence on tax cuts, which aggravate the fiscal shortfall, and its use of trust fund accumulations to pay for current government spending, the Administration?s program will reduce growth of national income by ever larger amounts?just under $500 billion in 2013. These tax cuts will add $130 billion annually to the governments interest payment burden in 2013. The revenue sacrificed by the tax cuts that the Administration has proposed since coming to office is more than sufficient to eliminate the entire projected deficits of the Social Security system and Medicare Hospital Insurance, with enough left over to double federal aid to higher education and bio-medical research and to support a major initiative to improve life chances for America?s children....

Posted by DeLong at 02:25 PM

Those Who Do Not Remember History...

Those who do not remember history are condemned to repeat it, and the rest of us are condemned to repeat it with them. Gerardo della Paolera and Alan M. Taylor point out that those who have studied the 1929 collapse of the gold standard in Argentina would have found few surprises indeed in the 2001 collapse of the currency board. Yet another brick in the wall suggesting that it is long-lasting institutional deficiencies that are the causes of the "bad policies" that overoptimistic economists like me think stand in the way of successful development and growth. Gaucho Banking Redux: Gerardo della Paolera, Alan M. Taylor | NBER Working Paper No. w9457 | Issued in January 2003 | Argentina's economic crisis has strong similarities with previous crises stretching back to the nineteenth century. A common thread runs through all these crises: the interaction of a weak, undisciplined, or corruptible banking sector, and some other group of conspirators from the public or private sector that hasten its collapse. This pampean propensity for crony finance was dubbed 'gaucho banking' more than one hundred years ago. What happens when such a rotten structure interacts with a convertibility plan? We compare the 1929 and 2001...

Posted by DeLong at 02:02 PM

The Equity Premium Puzzle

Rajnish Mehra has a nice new working paper out explaining why all the attempts to resolve the "equity premium puzzle" (the puzzle of the large gap between expected returns on stocks and government bonds that he and Ed Prescott singlehandedly brought to the forefront of economists' concerns nearly two decades ago) are unconvincing: The Equity Premium: Why is it a Puzzle?: Rajnish Mehra | NBER Working Paper No. w9512 | Issued in February 2003 | This article takes a critical look at the equity premium puzzle the inability of standard intertemporal economic models to rationalize the statistics that have characterized U.S. financial markets over the past century. A summary of historical returns for the United States and other industrialized countries and an overview of the economic construct itself are provided. The intuition behind the discrepancy between model prediction and empirical data is explained. After detailing the research efforts to enhance the model's ability to replicate the empirical data, I argue that the proposed resolutions fail along crucial dimensions. Normally I'd just quote the abstract, and I'd be done. But Rajnish's abstract stops just where things get interesting. "I argue that the proposed resolutions fail along crucial dimensions"--sheesh! So let me...

Posted by DeLong at 01:32 PM

No, Marty Feldstein Is Not "Voting" Against Bush...

ABC News's The Note now counts Marty Feldstein as a dissenter from Bush Administration economic policy. This does not seem to me to be true. Marty agrees with the Bush Administration in wanting to see taxes fall as a share of GDP. Marty is thinking more clearly than the Bush Administration in that he is focused--has long been focused--on the necessity for a severe pruning-back of the social-insurance state if reduced tax shares are to be a durable reality. (The Bush Administration wants to leave this as a problem for future Presidents, future Congresses, and future generation.) Where Marty dissents--and this has been the case for at least a year--is in viewing the current situation in which unemployment is above its natural rate and the economy is approaching the edge of deflation as... well, as a sign that stimulus is needed. In short, this was no surprise to me or to anyone else who has been watching Marty's thinking over the past year. Yet it seems newsworthy to The Note, which is one of the very best political newsletters around. Yet another example of how what seems very basic and fundamental to economists somehow turns into an unobservable nuance for...

Posted by DeLong at 01:02 PM

March 03, 2003
SpongeGeorge SquarePants

The Wall Street Journal's Alan Murray compares George W. Bush to SpongeBob Squarepants: - Political Capital: Therein lies the Bush administration's real deficit problem. It isn't the cost of war, which will come and go. It's the mismatch between the president's stiff-spined determination to cut taxes and his spineless efforts to reduce the size and scope of government. Mr. Bush is the Man of Steel when it comes to his tax cuts, but he's SpongeBob on spending. He sends his minions to take the heat on his budget and Medicare proposals, then caves when they come back under fire. Mr. Bush's economic plan makes sense if -- and only if -- he sticks to his guns on limiting spending and revamping Medicare and Social Security. If he fails to rein in the burgeoning cost of government, then his tax cuts will leave a fiscal mess that future presidents will have to clean up. Mr. Bush's new economic advisers -- Treasury Secretary John Snow and National Economic Council Chairman Stephen Friedman -- seem to understand this. Neither of them buys into the silly arguments being batted about that deficits don't matter. It's all a question of timing. Deficits don't matter...

Posted by DeLong at 09:23 PM

"But the Economic Report Did Nothing in the Nighttime" "That Was the Curious Incident"

Henry Aaron complains about what the 2003 Economic Report of the President does not talk about: The Brookings Institution: To be sure, this Economic Report deals with many important matters. It contains sophisticated reviews of tax policy, regulation, and international trade. But the central challenge facing budget policy in the United States is rather different?how to prepare the U.S. public finances for the fiscal challenge posed by the retirement of the baby boom generation. The first baby-boomers will become eligible for Social Security in just five years and for Medicare in eight. These dates usher in three decades of sharply increasing demands on the federal government to pay for pension and health benefits for the elderly, disabled, and survivors. In brief, the federal budget will come under increasing stress?sooner rather than later. Action is required to prepare the nation to handle this stress?now, and not at some indefinite future time. The fiscal challenge of the baby boom generation's retirement is not a distant problem that can be left to our children. It commences well within the ten-year planning horizon that Congress has been using for budget planning......

Posted by DeLong at 08:20 PM

The Real Supply Siders

John Quiggen succumbs to High Relativism, and proclaims that whether Ronald Reagan was "convinced" that cutting tax rates would raise tax revenues is unknowable. John Quiggin: Wanniski's claim to have convinced Reagan is rejected by (broad sense) supply-siders who were around at the time, like William Niskanen (quoted by Alex Robson), and it seems unlikely that the truth can be determined... I think that this nihilistic-relativistic conclusion is much too pessimistic. What Reagan thought in his heart-of-hearts is not very important. Reagan wanted to lower taxes, balance the budget, and cut waste, fraud, and abuse in government. He (naively) relied on his advisers--his Grand Viziers--to share his priorities and to prepare and implement policies that would accomplish them. It went wrong: Reagan did not run for President so that he could become the biggest deficit-spender in American history. We know a lot about how it went wrong. But if we are to accurately set out what we know, we need to recognize that "supply side" and "economist" are contested terms of art. Different people use these terms to mean different things--deliberately use these terms to mean different things. Let's review the bidding. There are four ideological police actions in progress....

Posted by DeLong at 10:26 AM

March 01, 2003
John Irons Tracks the Economy

John F. Irons tracks the economy... ArgMax Economics Weblog: Tracking the Economy: This has been a busy week for economic news; I thought I would give an update for the week: 2002Q4 GDP revised up to 1.4% (from a previously estimated 0.7%). Better, but not great. Hubbard out, Mankiw in at the CEA. His nomination shouldn't have been controversial - he is an accomplished and respected academic macroeconomist (and a fellow MIT PhD), but some right-wing supply-side economists are unhappy about what he wrote in his Principles book about Reagan's policies. Oil Prices are hitting 12-year highs and getting close to 40$ a barrel. Consumer prices rose 0.3% in January and wholesale prices (the PPI) jumped 1.6%. The increases were due in part because of rising energy prices. The core CPI and PPI (which exclude food and energy) increased by 0.1% and 0.9%, respectively. If the PPI increases continue and make their way to consumer prices, it will cause the Fed to think twice before reducing interest rates in the case of a "double dig" recession. On the bright side, the increases should lessen deflation fears. Consumer confidence fell to 9-year lows. The link between the Conference Boards' index and...

Posted by DeLong at 05:49 PM

February 28, 2003
Would Ezra Pound Have Been a Better Poet If He Had Taken Ec 10 From Marty Feldstein?

Would Ezra Pound have been a better poet if he had taken Ec 10 from Marty Feldstein? Daniel Davies appears to answer this question with a "yes," as he turns his attention to critiquing Pound's Canto XLV for Pound's failure to include an appropriate general-equilibrium model in his stanzas. D-squared Digest -- A fat young man without a good word for anyone: If you aren't able to charge rates of interest which compensate you for the risk you're taking, then as a lender, you're only going to do business with people familiar to you, which means that the typical working man is not going to find anyone who is prepared to lend to him. This means that the working class is denied one of the principle luxuries of the capitalist class; the ability to make decisions about the timing of purchases of goods independently of the fixed timing of the arrival of one's income. And it turns out that this is a very valuable advantage to enjoy. Usury has been very good in this regard. Pound is possibly in this passage and in the "bread made of good flour", thinking of the obvious association between predatory lending practices and poverty,...

Posted by DeLong at 08:21 AM

February 25, 2003
Thoughts on the Republican Economists' Letter

Thoughts on the Republican Economists' Letter So I downloaded and read the text and signature list of the Republican economists' letter supporting the Bush Administration's budget proposals: We enthusiastically endorse your economic growth and jobs proposal. It is fiscally responsible and it will create more employment, economic growth, and opportunities for all Americans. Moreover, it will improve corporate accountability and strengthen the nation's international competitiveness. I was somewhat disappointed for three reasons: I was moderately disappointed, first, that the letter was so short. If you have an opportunity as a professional economist to gain some media attention, you have a duty to use that opportunity to raise the level of the media debate over economic policy. This letter doesn't. It doesn't tell anyone who reads it why cutting dividend taxes would (if the appropriate adjustments are made to hold the right other things constant) be a good idea. It doesn't tell anyone who reads it why it would improve corporate accountability (a thing that nobody has explained to me to my satisfaction). It doesn't tell anyone who reads it how it would strengthen America's international competitiveness--let along what "international competitiveness" is, or why it is worth strengthening. I was slightly...

Posted by DeLong at 10:50 AM

February 13, 2003
Hal Varian Sees Inflation in Our Future

Hal Varian (whom I rarely see on the Berkeley campus, even though his office is only one building over) offers his prescriptions for what should be done in the short run, the medium run, and the long run as far as U.S. fiscal policy is concerned. Most interesting, however, is his forecast that feckless politicians combined with the structural features of American politics are likely to push us toward much higher inflation--once the president has obtained "a pliable Federal Reserve Board" which "can probably be arranged." Deficits and Political Pain: ...let me offer my own prescriptions for the short, medium and long term. Though there is a good chance that the economy will be significantly stronger this year, it wouldn't hurt to have some modest short-run fiscal stimulus. Consumers have kept on spending; the real budget shortfall is coming from business spending and state government cutbacks. A sensible stimulus package would involve a temporary investment subsidy, like accelerated depreciation or even an old-fashioned investment tax credit, along with direct grants to the states. State tax increases and budget cuts could well exert a significant fiscal drag on the economy in the next year, so some attempt to moderate their impact...

Posted by DeLong at 11:02 AM

February 12, 2003
Alan Greenspan Says the Expected, the Reasonable Thing

Alan Greenspan says the expected, the reasonable thing about the prospective return of the deficit and the long-run fiscal policy dilemmas of the American government. The truly surprising, the bizarre thing that I do not understand is why the Bush Administration PR flacks and their tame dogs in the press ever expected him to say anything else... Fed chief Greenspan undercuts GOP arguments for tax cuts - Feb. 12, 2003: The 'kiss of death': Warning of growing budget deficits, Greenspan again undercuts Bush, GOP arguments for tax cuts. February 12, 2003: 2:18 PM EST NEW YORK (CNN/Money) - Alan Greenspan stepped up his warnings about budget deficits Wednesday, forcing the White House to admit the Federal Reserve chief was at odds with President Bush's push for quick moves to stimulate the economy. In his second day on Capitol Hill, Greenspan told the House Financial Services Committee it was crucial that policy-makers ensure that "growing budget deficits [do not] again become entrenched.'' Bush's $695 billion stimulus plans forecasts record budget deficits this year and next -- drawing criticism from opposition Democrats. Administration officials contend the deficits are modest given the size of the $10 trillion U.S. economy and are needed to...

Posted by DeLong at 04:09 PM

February 11, 2003
Life, Liberty, and a Linen Shirt

Take it for granted (as I do) that a good society offers everyone the opportunity to make a decent living without undue toil (and without selling one's internal organs for transplants either). What is a "decent living"? Daniel Davies worries this problem like a moral philosopher, and comes up with three conclusions: In late eighteenth-century England, a good society would have offered everyone the right to earn enough to comfortably buy a linen shirt. In early twenty-first century America, a good society does not yet require that one have the right to earn enough to comfortably afford a cable mode. But just you wait: by 2010 (if Kim Jong Il does not blow the place up) in South Korea anyone who does not earn enough to comfortably afford DSL will be indecently poor. D-squared Digest -- A fat young man without a good word for anyone: ...My view on the subject of what constitutes a decent living goes right back to Adam Smith, whose views on the subject are not so well known, but exemplify the strand of humanity and sound common sense which has been so thoroughly ignored in his writing ever since he coined that phrase about the...

Posted by DeLong at 06:33 PM

What Greenspan Did Say

He called for reestablishment of something like the Budget Enforcement Act--"I am concerned that, should the enforcement mechanisms governing the budget process not be restored, the resulting lack of clear direction and constructive goals would allow the inbuilt political bias in favor of growing budget deficits to again become entrenched..." He refused to support the reduction of taxes on dividends unless other taxes were raised to make the net effect budget neutral--"the Fed chairman said he continues to support elimination of double taxation on dividends... only if other revenue can be found so as not to raise the budget deficit." NEW YORK (CNN/Money) - Federal Reserve Chairman Alan Greenspan warned Tuesday that "geopolitical tensions" have added to the uncertainties dogging the U.S. economy, making a recovery difficult, and called for more discipline to control the growing U.S. federal budget deficit. In response to questions from senators, the Fed chairman said he continues to support elimination of double taxation on dividends, but only if other revenue can be found so as not to raise the budget deficit. Greenspan, in prepared remarks for his testimony before the Senate Banking Committee, said uncertainties about a possible war with Iraq were "creating formidable barriers...

Posted by DeLong at 03:34 PM

A Short Dialogue on International Trade in Agricultural and Fishery Products

"Okay. One of the things that we are going to eat for lunch has travelled 9000 miles--almost halfway around the world--to land on our table. What is it?" "Bananas!" "Very good guess. But no. Bananas come from the Caribbean and Central America, and travel only 3000 miles or so to get here. It's the smoked salmon, from Tasmania, island off of the southeastern tip of Australia." "I've heard that most animals native to Tasmania are endangered. Is that true?" "BA-NA-NAS!" "It's certainly true that large Tasmanian marsupials are under very heavy pressure from introduced Eurasian forms that fill the same niches..." "BA-NA-NAS HAVE NO THUMBS!" "But does anybody have an idea why I would buy smoked salmon from Tasmania--Royal Tasmanian brand?" "So that you can torture your children with another boring lecture about international trade, the international division of labor, and the importance of human pwogwess through the mutual weduction of twade bawwiews?" "Plausible, but not true in this case..." "BANANAS STAND UP STRAIGHT!" "Because they were cheap?" "Yes, exactly, why were they cheap--half the price of Alaskan smoked salmon?" "BANANAS HAVE NO THUMBS!" "Either because you got a bargain, or because you don't know something about the quality of...

Posted by DeLong at 03:05 PM

David Hume Gives Adam Smith Some Bad News

David Hume gives Adam Smith the bad news about the reception of Smith's first book, the Theory of Moral Sentiments. From DAVID HUME   Lisle Street, Leicester Fields April 12, 1759 Dear Smith, I give you thanks for the agreeable present of your Theory [of Moral Sentiments]. Wedderburn and I made presents of our copie to such of our acquaintance as we thought good judges, and proper to spread the reputation of the book. I sent one to the Duke of Argyle, to Lord Lyttleton, Horace Walpole, Soames Jennyns, and Burke, an Irish gentleman, who wrote lately a very pretty treatise on the sublime. Millar desired my permission to send one in your name to Dr. Warburton. I have delayed writing to you until I could tell you something of the success of the book, and could prognosticate with some probability whether it should be finally damned to oblivion, or should be registered in the temple of immortality. Tough it has been published only a few weeks, I think there appear already such strong symptoms, that I can almost venture to fortell its fate. It is, in short, this-- But I have been interrupted in my letter by a foolish...

Posted by DeLong at 03:02 PM

September 13, 2002
Paul Krugman on the "Economic Rationale" for War Against Iraq

Perhaps the stupidest things written about what action should be taken in response to Iraq's flouting of U.N. resolutions on its armaments are Larry Kudlow's cry to invade Iraq to raise the Dow and John Podhoretz's cry to invade Iraq to elect more Republicans to Congress in November. Here Paul Krugman takes on the mostly-whispered claim that a war against Iraq would be "a good thing" for the American economy. Needless to say, policy should rest on whether Saddam Hussein is the successful object of containment policies--a cautious tyrannical madman--or is likely to develop and use weapons that will turn New York or Tel Aviv into abattoirs, not on its effect on the year-over-year growth rate of real GDP. Stocks and Bombs: ...World War II is a very poor model for the economic effects of a new war in the Persian Gulf. On balance, such a war is much more likely to depress than to stimulate our struggling economy. There is nothing magical about military spending — it provides no more economic stimulus than the same amount spent on, say, cleaning up toxic waste sites. The reason World War II accomplished what the New Deal could not was simply that...

Posted by DeLong at 11:00 AM

September 12, 2002
Jeffrey Frankel on U.S. Economic Policy

Jeffrey Frankel asks a hard question: why, for the past two decades, have the economic policies pursued by Republican administrations been so lousy? Over the past two decades, he points out, Republican administrations have been more protectionist, less eager to promote competition, and fiscally irresponsible. Democratic administrations have been more favorable toward free trade, more eager to let competitive markets work, and strongly oriented toward budget surpluses. What's going on? Frankel's answer appears to be that Republican presidents are--don't laugh--drawn from what John Stuart Mill used to call the stupid party. They simply do not understand that bad economic policies are produced not because of the moral failings of politicians and bureaucrats, but because each interest group believes that it deserves a special favor from the government. Resisting such claims from your political supporters requires " stamina, knowledge, ability to absorb and synthesise facts, analysis, ability to communicate, and willingness to trade off issues when constraints make it appropriate, while taking unpopular stands when required." And these qualities George W. Bush's administration seems to lack, badly. / World: ...Governing is far from easy. Intelligent economic decision-making requires painstaking work: gathering detailed information, making logical analysis of trade-offs, and confronting...

Posted by DeLong at 10:03 PM

Ken Rogoff on the IMF

Ken Rogoff on the claim that IMF bailouts take the money of rich-country taxpayers, give it to the unworthy, and so create "moral hazard". (He also covers a host of other issues.) ...It would be hard to overstate the influence of the popular perception that IMF crisis loans are thinly disguised bail-outs, with the tab paid mainly by ordinary taxpayers in the industrialised world. The presumed need to limit such bail-outs, and their adverse long-term incentive effects, is a central element of virtually every important plan out there to improve the way the IMF does business. The challenge posed by the bail-out view is not simply lack of transparency—that IMF loans are really outright transfers and should be called such. No, the deeper and more troubling implication is the “IMF moral hazard” theory. Simply put, if lenders are confident they will ultimately be bailed out by heavily subsidised IMF loans, they will extend too much credit to emerging-market debtors at rates that do not reflect the true underlying risk. The result? Bigger and more frequent crises than if the IMF did not exist. Giving the IMF more resources, it is argued, exacerbates the crises it was designed to alleviate....

Posted by DeLong at 02:21 PM

September 09, 2002
Stephen Roach on "The Great Failure of Central Banking"

I don't agree with Stephen Roach that the Federal Reserve should have made interest rates higher and tried to make unemployment higher in the late 1990s in order to diminish investment spending and collapse the stock market bubble. In my view, the time to deal with any problems created by the bubble's collapse is when the bubble collapses--not before. Relative to a lower-stock prices, lower-investment, one-percentage-point-of-unemployment-higher bubble-popping path for the U.S. economy in the late 1990s, the actual path that we took gave us an extra $1 trillion of real production. You can complain about how that $1 trillion was distributed. You can regret that a large chunk of it--$200 billion?--was spent on investments that have much lower social value looking forward than their social cost. You can fear the damaging consequences of banruptcy and fraud on the economy. But you have to argue that these drawbacks from the fallout are quantitatively very large for the cost-benefit analysis to go Stephen Roach's way. Nevertheless, he makes his case more strongly than anybody else does: Morgan Stanley: ... Yet out of this glorious disinflation a new inflation was borne -- asset inflation. And central bankers didn’t have a clue how to...

Posted by DeLong at 09:58 AM

September 08, 2002
Six Degrees of Paul Krugman

Peter Passell writes about his twelve favorite economics websites. From the Milken Review that he edits: paul krugman | | Unofficial Everyone, it seems, either loves Paul Krugman, or loves to hate him. One reason is that he gets amazing exposure through his Op-Ed column in The New York Times. Another is that he writes better than any economist since Keynes. Yet a third is that he doesn’t suffer fools (or knaves) easily – which often makes his opinion pieces a gas to read. His own Web site contains a sampling of his work, including some striking analytic pieces. But his unofficial site, run by Krugman groupies, is a whole lot more complete, and a whole lot more fun. It includes a lot of material about Krugman as well as stuff by him. xavier sala-i-martin | Some economists are smart. A few are funny. A very few, including Columbia University’s Xavier Sala-i-Martin are smart and funny. Who else, after all, would grace his home page with a picture of Miss Piggy in her pigs-in-space getup, and a pair of floating eyeballs that follow your cursor around the site? Check out the picture of his favorite supermodel. Or...

Posted by DeLong at 11:01 AM

Ball and Mankiw on the "Natural Rate" of Unemployment

Larry Ball and Greg Mankiw have a very nice paper on the unemployment rate at which inflation is stable--the so-called NAIRU. The most fascinating part of the paper deals with the question of why the U.S. NAIRU fell so far and so fast in the 1990s. Ball and Mankiw find that they lean toward the hypothesis that the NAIRU is actually closely linked to the trend rate of productivity growth. The NAIRU in Theory and Practice: NAIRU stands for the nonaccelerating inflation rate of unemployment. It is beyond dispute that this acronym is an ugly addition to the English language. There are, however, two issues that fail to command consensus among economists, which we address in this essay. The first issue is whether the concept of NAIRU is a useful piece of business cycle theory. We believe it is, and we begin this paper by attempting to explain why. In our view, the NAIRU is approximately a synonym for the natural rate of unemployment. This concept follows naturally from any theory that says that changes in monetary policy, and aggregate demand more generally, push inflation and unemployment in opposite directions in the short run. Once this short-run tradeoff is admitted,...

Posted by DeLong at 08:35 AM

September 06, 2002
Think Analytically!

Think Analytically! I remember one day during the first Clinton Administration when Joe Stiglitz came into the room to chair a meeting, looked around, noticed that--so far--only economists had shown up, and announced that nobody who did not have a Ph.D. in economics would be allowed to speak at the meeting. (Do I need to point out that that Joe was making a joke?) He was. All of us got it. All of us cheered and applauded. We did so not because we Clinton-era economists all agreed on all the issues--anybody with half an ear to the ground would know that we did not. We did so because we had found that it was possible to make intellectual and policy progress in discussions with economists because we had all been trained to think analytically: to break the issue down into background assumptions about the world, beliefs about the principal causal mechanisms, and claims about the likely effects of different policies on those chains of cause-and-effect. When we disagreed--as we often did--we could quickly ascertain where and why, and then agree on how to go hunting for pieces of information that would help resolve the disagreement. This was in striking contrast...

Posted by DeLong at 05:58 PM

August 28, 2002
Defending the Economy by Attacking Asset Prices?

I have always been of the school that central banks should watch asset price bubbles with alarm, but should not raise interest rates in order to try to prick them. My guiding principal has thus been: "Sufficient unto the day is the evil thereof." I suppose I have been most affected by the memory of the Great Depression, where the Fed's desire to restrain asset prices generated interest rate increases that played a role (how big a role is still in dispute) in starting the snowball that became the avalanche of the Great Depression. Here Samuel Brittan cautiously, judiciously makes the case for a more aggressive policy toward asset price bubbles. I'm unconvinced, but it is certainly worth thinking about. Samuel Brittan: Taking asset prices seriously: ...a regime of inflation targets alone has now come under criticism for a different reason. The fear now is not that real output has been neglected but that asset prices have been. There is a vigorous if rarefied debate about whether asset prices as well as consumer price inflation should be specifically targeted. The riposte of central bankers is that asset prices are in fact taken into account insofar as they are expected to...

Posted by DeLong at 09:17 PM

August 26, 2002
Max Sawicky vs. the Hax and Spinmasters of the Eisenhower Building

Max Sawicky tries to unspin the unspinnable--to say quickly, concisely, and convincingly that what has caused the deterioration in the long-run fiscal outlook is not the Republican "trifecta" of "war, recession, and national emregency." Instead, the major causes of the deterioration are (i) the gradually phased-in 2001 tax cut, and (ii) a revised economic model that is more cautious about the likely future relationship between real GDP and tax revenues. He's right, of course. And Mitch Daniels is wrong. Weblog Entry - 08/26/2002: his testimony today, OMB Director Mitchell Daniels repeats the basic line -- that war, recession, and homeland security are important causes for the worsened budget outlook. But just how important? Let's go over some very simple math. In January 2001 the projected surpluses for 2002 through 2011 were $5.637 trillion. Today under the President's proposed budget, they would be $444 billion for the same ten year period (p. 7, Daniels). Where did the $5.193 trillion fly away to? According to Daniels, it breaks down this way: tax cuts, $1.491 trillion; 'other enacted legislation,' $760 billion; President's proposals, $1.273 trillion; and 'economic and technical reestimates,' $1.669 trillion. Now as I've been ranting for a couple of weeks...

Posted by DeLong at 04:25 PM

August 22, 2002
Glenn Hubbard Keeps Pitching

From the Financial Times: CEA Chair Glenn Hubbard: "If you ask the narrow question, are steel tariffs in the US economic interest, the answer is no." Good to see that Council of Economic Advisers Chair Glenn Hubbard is still in there pitching, still clear on what the difference between good and bad economic policy are. But where are the Trade Representative, the Assistant to the President for Economic Policy, and the Treasury Secretary? If CEA gets no support from anywhere else in the government, the White House tends to treat the question "are these economic policies good for the country?" as an irrelevant academic distraction. By contrast, if Treasury and the National Economic Council strongly back the proposition that the most important thing is getting policies right for the long run, then the CEA's arguments become very powerful. If you read the full interview of Glenn by the Financial Times, you see a striking disconnect: the FT wants Glenn to talk about whether the Waco Economic Forum and the tax cuts for investors likely to be proposed as a result of it will strengthen the short-run recovery. Glenn doesn't want to talk about that. (In his shoes, I wouldn't want...

Posted by DeLong at 08:34 AM

August 21, 2002
Go To College!

If you're listening to this, are under 35, and haven't been to college: go to college. If you have children who are thinking of not going to college: convince them to go to college. Harvard economists Claudia Goldin and Larry Katz have called the twentieth century, "America's century of education." During that century the United States widened its lead over other industrial economies by creating the universal high school, and by developing a large and flexible system of colleges and universities. They believe that this educational expansion greatly increased the skills and adaptability of America's labor force throughout the twentieth century, and was a large part of the reason that America was and is richer and Americans more productive than people anywhere else in the world. But in the past few decades we've seen a slowdown in the growth of education in America. This slowdown has been accompanied by a sharp rise in the difference between the earnings of young workers who have and have not been to college. We economists are scratching our heads: since the--economic--benefits of going to college have become so large, why aren't more people going? One possibility is that people do not realize that the...

Posted by DeLong at 05:09 PM

America's Date with Deflation?

America's Date with Deflation? Two years ago, at the peak of the late-1990s boom, the American economy was slightly overheated. As the unemployment rate fell to four percent and below, inflation began to creep upward, rising by between a quarter and half a percentage point each year. By late 2000 it was very clear that America's GDP was one to two percentage points above potential output--above that level at which aggregate demand balanced aggregate supply, at least in the sense that there was neither upward nor downward pressure on inflation. Today things are very different. Today, in the summer of 2002, America's level of real GDP is running some two percentage points higher than it was in the summer of 2000. However, underneath is the extremely strong underlying productivity growth trend driven by the very real technological revolutions in data processing and data communications. These technological revolutions have boosted potential output by perhaps seven percent over the past two years. Thus today America's real GDP is not one to two percent above but three to four percent below potential output. How do we know this? Simply look at the unemployment rate: today America is producing two percent more than it...

Posted by DeLong at 01:22 AM

August 18, 2002
Paul Krugman Sounds Nervous

Paul Krugman sounds nervous. Paul Krugman sounds very nervous. I think he's right: I'm very nervous too--especially given the whispers I hear from Wall Street which suggest that our current problems in corporate reporting may drive large wedges between the interest rates the government can borrow at and the terms on which businesses can raise capital. SOME DEFLATION THOUGHTS: (8/17/02) A followup on Friday's NYT column: first, Brad DeLong is quite right that there's no such thing as excess capacity for the economy as a whole. I've been vociferous about that myself in the past. What I meant to say was over-investment in short-lived business capital, mainly tech, relative to other resources - which is the sense in which an over-investment model of the business cycle can be justified - the same sense in which business as a whole can find itself with excess inventories. That's a longish story, and quite tricky to model - more when I have some spare time (hahaha!). Now, about the risks. My back-of-the-envelope estimate of the current output gap is the same as his - 4 percent. That could be wrong - we don't really know how overheated the economy was at its peak....

Posted by DeLong at 08:05 AM

August 16, 2002
How Large Is the Output Gap?

How large is the output gap--the gap between the economy's current level of production and potential output, the level of production consistent with stable inflation? Paul Krugman has some smart things to say about this question. My answer? That two years ago the output gap was -1 percent--that is, actual production was 1 percent higher than the level consistent with stable inflation--and today the output gap is 4 percent: we could be making 4 percent more stuff without having to even begin to worry about inflation starting to creep upward. I do, however, have one criticism to make of Paul Krugman's argument. He talks about "excess capacity." There can be--and is--excess capacity in individual industries, like telecom (although this will be quickly taken care of as telecom firms go bankrupt, their assets are taken over by other companies with rational capital structures, and telecom service prices fall through the floor). There's no such thing as "excess capacity" for the U.S. economy as a whole. Further declines in the dollar would spur demand for U.S. exports and for U.S. producers of import-competing goods. Further declines in interest rates would (with proper management of the state of our financial institutions and operating...

Posted by DeLong at 01:50 PM

August 02, 2002
Brink Lindsey on Trade Promotion Authority

Brink Lindsey worries that winning Trade Promotion Authority--restrictions on Congress's ability to amend any trade agreement the President negotiates in the process of approving it--will turn out to be a hollow victory for free trade: What Next after TPA? "...Indeed, the way the TPA fight has been fought will make the real job of trade liberalization more difficult. To get TPA through Congress, the Bush administration made one concession after another to protectionist and pro-subsidy lobbies -- imposing steep duties on steel and lumber; caving in to textile-industry pressure against opening markets to Caribbean, South American, and Pakistani goods; and, perhaps worst of all, acquiescing in egregiously profligate new farm subsidies. "After this string of sellouts, U.S. credibility with our trading partners is currently hovering near zero. As a result, America's ability to assume its normal role in leading trade negotiations is now in serious doubt. How can the U.S. tell other countries to take political risks for freer trade when we are unwilling to follow our own advice? The administration may find that, in winning congressional authority to promote trade, it has lost the moral authority to do so..."...

Posted by DeLong at 11:21 AM

July 01, 2002
Older Economists' Opinions

Here are some older economists' opinions (from before the Great Reorganization of this website)....

Posted by DeLong at 07:44 PM