Creative Destruction

The Tuesday Night Massacre

noreply@blogger.com (Char Weise) — Wed, 10 May 2017 14:01:00 +0000

Trump's firing of James Comey has been compared to Nixon's Saturday Night Massacre. Here's the difference: Nixon new he had committed a crime and was desperately trying to cover it up. Trump does not know or care whether he committed a crime. Trump is all about Trump: his financial interests and his press. Trump may or may not have colluded with Russian intelligence during the campaign. I don't think that Trump knows what types of collusion would or would not violate U.S. law. I don't think he paid attention to the contacts the people involved in his campaign were having with the Russians. He won the election, and that is all that matters to him. The victory vindicates any actions he took to get it.

So why did Trump fire Comey? Those who buy (or sell) the story that it was about Comey's violations of procedure during the campaign are just making ex post justifications for Trump's decision. Trump doesn't know what proper procedure is and he doesn't care. All he knows is that Comey is the source of an enormous amount of bad press for Trump. The longer the Russia investigation goes on, the longer Trump has to watch critical press coverage of himself on cable news. Again, he doesn't know whether he did anything illegal during the campaign. But whether his actions were legal or illegal, the investigation paints him in a bad light, and that's intolerable. This is Trump: if you flatter him he makes you his ally or confidante; if you criticize him, you are his enemy and you must be destroyed.

I think the Republic can survive Trump's narcissism and self-dealing. As for the self-dealing, most of our recent presidents have cashed in on the Presidency (though importantly they waited until they left office before doing so; Trump is on a different scale entirely). But it can't survive the willingness of his advisers, appointees, and political allies to serve as accomplices. Rod Rosenstein was supposed to be a man of unimpeachable integrity. His nomination to the office of Deputy Attorney General was confirmed in the Senate by a vote of 94-6. When Jeff Sessions and Donald Trump told him to come up with a justification for firing Comey, he should have refused. Yes, there are grounds to fire him, but you cannot do this while he is in the middle of a criminal investigation of your administration. At the very least, wait until the Inspector General's report is submitted, and announce his firing at the same time as you announce an independent counsel to take over the investigation. Instead, of course, he fell in line.

What about members of the Administration? Ok, Kellyanne Conway and Sean Spicer are irredeemable. But is there no one in the White House who will tell Trump that he can't do what he is doing (firing the head of the FBI, lying incessantly about things like crowd size that are significant only to him, tweeting insane accusations against the former president, calling his political opponents childish names,...)? Is there no one who will refuse to stand before the cameras and lie on behalf of the president or feed his delusions?

Worst of all is the Republicans in Congress. Senators like McCain and Burr occasionally express concern about Trump's behavior. But no Republican Senator has stood up and demanded an independent counsel. In this week's Senate hearings, Lindsay Graham spent his entire time focusing on the "unmasking" red herring rather than Russian meddling in the election. When push has come to shove, there has not been a single Republican who has stood up against Trump and in support of our fundamental democratic institutions.

Unless this latest abomination forces a change in the Republicans' behavior (which I doubt - after all, there are still rich people's taxes to cut and poor people to be thrown off their health insurance, and they need a Republican president to do those things), the last remaining line of defense for democracy is the 2018 elections. I'm concerned that Republican voters, and maybe a majority of the people who come out to vote in 2018, do not care enough about our democratic system for any of this to change their votes. They are too misinformed, too wrapped up in culture wars and hate (of immigrants, muslims, LGBTQ people, the poor, the liberals, the coastal elites,...) to do the principled thing and vote out those who are obstructing the investigation of the president. But suppose there is a groundswell of revulsion against Republicans in 2018. Does anyone doubt that Russian intelligence agencies are right now trying to figure out ways to throw the vote to the Republicans? If fake news and leaked emails doesn't do the trick this time, is there any doubt that they are trying to figure out ways to tamper with our electronic voting systems? And what is Congress doing about this? Maybe they'll get to it after they've taken away your health care and cut Trump's taxes, but don't hold your breath.

How to think about the Fed's monetary policy (in)action

noreply@blogger.com (Char Weise) — Thu, 28 Jul 2016 16:09:00 +0000

Yesterday (July 27), the Federal Open Market Committee met and decided to maintain the target for the federal funds rate at 1/4 to 1/2 percent. Here are some thoughts to help make sense of the Fed's decision.

(1) In your Principles and Intermediate Macroeconomics courses you learn a lot about the mechanics of monetary policy: what the Fed is doing when it sets interest rates and how this affects the economy. There are also discussions of this in the readings on the Fed Challenge Moodle site - you should take a look if you haven't already. Briefly:
- The federal funds rate is the rate banks charge each other for overnight loans of reserves
- The Fed used to control the federal funds rate by adjusting the supply of reserves in the banking system through open market operations. Over the past 8 years the Fed has created far more reserves than the banking system needs, so the Fed now uses the interest it pays on reserves to control the federal funds rate.
- The federal funds rate anchors all types of interest rates from checking deposit rates to commercial paper rates to mortgage rates, because all of these assets are (imperfect) substitutes for federal funds. When the Fed keeps the federal funds rate low as it currently does, interest rates throughout financial markets will be low.
- The level of interest rates affects asset prices: when interest rates are low, the price of stocks, housing, and other assets tend to be high because asset prices are related to the present value of asset returns.
- Low interest rates encourage spending (especially on durable goods financed by loans) and investment (both business investment and residential investment, i.e. purchases of housing). High asset prices encourage spending because they increase the wealth of households and businesses. Hence the Fed's low interest rate policy has the effect of stimulating the economy. A decision to raise interest rates would have had the effect (and been intended to) slow the growth in the economy, perhaps reflecting a fear of inflation.

(2) Principles and Intermediate courses spend less time on the strategy of monetary policy. What motivates the Fed to continue its low interest rate policy? Why might it decide eventually to raise interest rates? Some thoughts:
- Historically, the Fed's interest rate decisions are well-approximated by the "Taylor rule." When inflation and unemployment are not a problem, the federal funds rate is set to its neutral value (currently probably around 3 percent) reflecting the "natural rate of interest" consistent with full employment. The federal funds rate will be reduced below that rate when GDP is below full employment (unemployment above its natural rate) and/or when the inflation rate is below the Fed's long-term target. The fed funds rate will be raised above its neutral rate when GDP is too high (unemployment too low) and/or inflation is too high.
- But there is a limit to how low the Fed can reduce interest rates. Because dollar bills earn a zero percent interest rate, economists have long argued that the federal funds rate and other interest rates could never fall below zero; it was said that interest rates have a "Zero Lower Bound." It turns out that the lower bound may be slightly negative, reflecting the cost and inconvenience of holding cash. Some other central banks have set their overnight interest rates at a fraction of a percentage point below zero. So we don't know exactly where the lower bound is, but there almost certainly is one.
- The Fed's choice of interest rate is complicated by a number of factors including uncertainty about the state of the economy due to imperfections in the data; uncertainty about the effects of monetary policy because our models of the economy are often not very good; and lags in the effects of changes in interest rates that require the Fed to respond not to the current state of the economy but the expected state of the economy 6-18 months in the future.
- The Fed's job is also complicated by the problem of "credibility". The Fed does not want to raise interest rates today only to lower them again at the next meeting. Doing this would cause the public to doubt the Fed's competence. It would also make future interest rates less predictable, weakening the Fed's control over longer-term rates. The Fed also doesn't want to change its target by a lot in a single meeting, lest the public interpret the Fed's move as a panicky response to changes in the economy. (Also the Fed wants to avoid wild swings in asset prices.) The Fed wants to project the image of being in control, standing strong at the helm of the economic ship, calmly making modest adjustments to the ship's direction in order to guide it through rough waters. The Fed will not raise interest rates until it is fairly certain that they need to be raised, and when it does the Fed will increase rates in small amounts over several successive FOMC meetings.

(3) If you've been paying attention to monetary policy in the newspapers, business tv reports, and blogs (as you should be doing!), you may have an idea of the historical context of the Fed's recent decision. The Fed reduced interest rates to near zero in December 2008 in response to the 2008 financial crisis and recession. The federal funds rate remained near zero until December 2015, when the Fed raised it a quarter of a percentage point (to the current range). Never before in its history had the federal funds rate been below one percent. Never has the federal funds rate remained so low for so long. This reflects the extraordinary severity of the recession and the slow recovery that followed. The decision to raise rates in December was controversial (Gettysburg College's 2015 Fed Challenge team argued strenuously against it). The majority of the members of the FOMC seem to be willing to wait to continue raising rates until the economy demonstrates considerably more strength, but a vocal minority believes that the Fed should raise rates now, if not several months ago. A lot of people in the financial world have been arguing for an increase in interest rates, while most macroeconomists think the Fed should wait. That's an interesting division of opinion that I have never fully understood.

So in our discussions in this fall's Fed Challenge, we will be asking these questions (over and over again!):
- How close is the economy currently to "full employment" and "price stability" (the Fed's "dual mandate")? Does the current unemployment rate of 4.9% underestimate the degree of slack in the labor market? Is real GDP growth rate of 2% per year (give or take) as good as we can do?
- Is the economy on a path towards full employment, which would justify increasing interest rates, or is the economy still "dead in the water"?
- What are the key economic indicators that the Fed should be paying attention to in judging the economy's progress toward full employment?
- How much should the Fed be concerned with financial markets? Are low interest rates encouraging excessive speculation, laying the ground for another financial crisis? Would raising interest rates spook financial markets and trigger a crisis?
- What kind of risks are out there in the U.S. and global economy that the Fed should be paying attention to: dramatic changes in oil prices? recession in China? collapse of the European Union? debt buildup in emerging markets? How might the outcome of the U.S. presidential election affect the economy? How should the Fed respond to these events?

You should be reading as much as you can stomach about current events in the macroeconomy. Pay attention to data releases like the Employment Situation report (the next one is August 5). Read the Wall Street Journal, Economist, Financial Times, whatever you can get your hands on. Be prepared for some good conversations beginning at our first meeting in September!

Things liberals shove down our throats (a partial list)

noreply@blogger.com (Char Weise) — Mon, 21 Dec 2015 22:01:00 +0000

Health reform (John Boehner)

Same-sex marriage (David Vitter)

The homosexual lifestyle (Dave Agema)

Soccer (“Mike")

Amnesty (Ted Cruz)

Trans-Pacific Trade Partnership (Alex Jones)

Obama’s vacation (Greta Van Sustern)

The tide of moral decay (Franklin Graham)

The cybersecurity bill (Donn Marten)

Obamacare (Matt Blumenfeld)

Their opinions of Donald Trump (Sharyl Attkisson)

Michael Sam (Lisa Needham)

Change (Dennis Hastert)

Obamacare again (Washington Examiner)

The spending bill (Jeff Sessions)

The Common Core (J.D. Heyes)

Again with Obamacare (Megyn Kelly)

The radical gay agenda (America’s Conservative News)

Gun control (Doug Book)

Homosexuality (Joseph Patrick McCormick)

Immigration reform (Glenn Beck)

An abortion mandate (Michelle Malkin)

Agenda 21 (Michael Snyder)

Health care (Richmond Tea Party)

Gun control (Dana Loesch)

Obamacare one more time (The Federalist)

Trans gender (“LOTRfan283”)

This immoral lifestyle (Plano Citizens United)

The term “Islamophobia” (Ricochet)

Treasury theft (Canada Free Press)

Jobs bill (Eric Cantor)

It (Utah Lawmaker, Note: this has something to do with gays; also he didn’t want “it” in “my kid’s face.”)

Health care law (Lawrence Harris)

Diversity (Emily Yavitch)

A socialist coup (Pamela Geller)

Socialized medicine (Ron Lipsman)

Gender radicalism (Frontpage Mag)

Amnesty for illegal immigrants (End of the American Dream)

Obamacare - is this a pattern? (Rush Limbaugh)

United Nations treaty (Texe Marrs)

More than Oreos (Charisma News)

Agenda 21 authoritarianism (Gulag Bound)

The blue pill (Return of Kings)

Anti-New Orleans monument rhetoric (The Hayride)

Audits (Jonathan Weil)

Obamacare - last time (Mitch McConnell)

Kwanzaa (Glenn Grothman)

Hillary Clinton (Next Level News)

Marxist doctrine (National Review)

Dollar coins (Forbes)

Obama’s partisan agenda (Phil Gramm and Michael Solon)

Islam (Islam Exposed)

This phony doctrine (Cal Thomas)

The omnibus vote (Patterico)

Discredited brand of socialism (Communities Digital News)

EB-5 (Ronald Klasko)

This budget (Congressman Broun of Georgia)

The League of Nations (W. A. Jarrel)

Electric vehicles (Powerline)

Obamacare - oops, there it is again (Jon Kyl)

Birth control (Michelle Bachman)

Trannies (Alex Jones)

Reckless health care bill (Kingsley Guy)

Obama (JammieWearingFool)

Seedless watermelons (Iron Mountain Daily News)

Monetary policy in the Republican debate

noreply@blogger.com (Char Weise) — Thu, 12 Nov 2015 16:12:00 +0000

There were a lot of questions about monetary policy in Tuesday's Republican debate. None of the candidates seemed to be happy with the Federal Reserve's efforts to stimulate growth. Several explicitly charged Janet Yellen with carrying out the political wishes of the Obama Administration - I guess the argument is that she's been keeping interest rates artificially low to reduce the cost of financing Obama's massive budget deficits. Two problems with that: Obama's budget deficits aren't massive, and the Fed just doesn't do that. There's a disturbing tendency among Republican presidential candidates to play to the paranoia of the Republican base, accusing every agency of government (and every organ of the media for that matter) of conspiring against the public interest on behalf of the liberal elite.

Behind the scenes and for a few decades now, there have been efforts by some in Congress, aligned with right-leaning economists, to trim the Fed's sails. Whether these efforts arise from an ideological commitment to "sound money" or simply political interest is an open question. The latest efforts involve changing the Fed's "dual mandate" (its job, as determined by Congress in 1946 and again in 1978 to maintain full employment and price stability) to a focus only on price stability. Supplying the intellectual justification for this policy is Stanford economist John Taylor. In 2010 he and Paul Ryan teamed up to write an editorial that accused the Fed of triggering the housing bubble and crash by deviating from a "rules-based" monetary policy. Taylor and Ryan proposed enshrining the pure inflation target in law in order to restore predictability to monetary policy and along the way strengthen the Fed's political independence:

While consistent with the "sugar-high economics" practiced in Washington of late, quantitative easing marks a further departure from the foundations for prosperity and another step toward an increasingly politicized central bank.

QE1 involved the Fed in areas of fiscal policy, such as credit allocation, that are properly (and constitutionally) the domain of Congress. QE2 would double down on these expansions, as the planned purchases of Treasury securities would constitute a large fraction of soon-to-be-issued federal debt.

This looks an awful lot like an attempt to bail out fiscal policy, and such attempts call the Fed's independence into question.

For all of these reasons, Congress should reform the Federal Reserve Act, particularly the section of the act that establishes the Fed's dual mandate. The Fed should be tasked with the single goal of long-run price stability within a clear framework of overall economic stability. Such a reform would not prevent the Fed from providing liquidity, serving as lender of last resort, or cutting interest rates in a financial crisis or a recession.

Experience shows that a focus on price stability is the surest way for monetary policy to lay the groundwork for strong economic growth. The 1980s and 1990s had better economic performance than the stagflationary 1970s in part because the Fed did not waver from its primary goal of checking inflation.

Setting aside the issue of the Federal Reserve's independence (I see the potential for trouble in the Fed's unconventional policies, but I think the Fed has been very careful to design its interventions in as neutral a fashion as possible at least since Obama has been president), the economic case for a change in the mandate seems really weak. Reading Taylor and Ryan one might think that the Fed has been violating its price stability mandate since the early 2000's. Has it? Well, it has long been understood that the Fed interprets "price stability" as medium term inflation equal to 2% as measured by the personal consumption expenditures price index, and that the Fed is primarily concerned with "core" PCE inflation (which strips out volatile food and energy prices from the index). Here is the year-over-year core PCE inflation rate since the mid-1990s when the 2% target was unofficially implemented (since 2012 the target was made official in public Fed documents):

It doesn't look to me like the Fed has been running a terribly inflationary policy - in fact, it has been undershooting its inflation target more often than over-shooting it, suggesting the need for more not less aggressive policy actions. The average inflation rate from 1995 to 2007 was 1.8 percent. Even in the housing bubble period that Taylor and Ryan are so concerned about (let's say 2003-2007), the inflation rate averaged almost precisely 2 percent. At the peak of the housing bubble inflation was only 2.4 percent. So where is the crying need to reinforce the price stability mandate? (For the record, though overall PCE inflation is more volatile than core inflation, the average over long periods of time is about the same. From 1995-2015 core inflation has averaged 1.7% while overall inflation has averaged 1.8%. The fact that core inflation averages overall inflation over long periods while being less volatile over short periods is the reason the Fed focuses on this measure.)

Taylor and Ryan's argument really turns on a particular definition of "rules-based" monetary policy. They propose that the Fed be required to publicize a formula to determine the federal funds rate:

In particular, the Fed should explicitly publish and follow a monetary rule as its means to achieve price stability. Such a rule should include, among other things: greater simplicity; a description of interest-rate responses to economic developments including how the Fed will achieve those responses through money growth; and greater attention to commodity prices, including food and energy, as opposed to a myopic overemphasis on core inflation.

I'll note briefly the misuse of the term "myopic" in the passage above. The Fed's use of core inflation rather than overall inflation allows it to focus on meeting its medium-term objectives for inflation. Responding instead to overall inflation would require the Fed to make frequent sharp policy moves in response to transitory movements in oil, food, and other commodity prices, even at the risk of sacrificing its medium-term objectives. Now that would be a myopic policy.

But my main point is that what Taylor and Ryan are proposing is what we in the business call an "instrument rule" as opposed to a "targeting rule." This is not surprising, because Taylor is famous largely for his advocacy of the most famous instrument rule, the "Taylor rule," since the early 1990's. There's a rich literature comparing the pros and cons of instrument versus targeting rules. In the context of the last 20 years, it seems to me that the chief benefit of using targeting rules (e.g. the Fed's 2% inflation target) over instrument rules is that it allows the Fed to modify its response to macroeconomic conditions when there are changes in the relationship between interest rates and the economic variables the Fed is trying to affect. For example, recent studies suggest that the "neutral" rate of interest has been falling for many years now. The original Taylor rule assumed a neutral rate of interest of 4 percent (i.e. 4% was the appropriate setting for the federal funds rate if the economy was at full employment and inflation at its 2% target). Today the neutral rate is almost certainly lower, perhaps 2 or 3 percent. If the Fed were to adopt the 1990's version of the Taylor rule it would have (inappropriately) raised interest rates awhile ago, slowing the recovery and pushing inflation even further below the 2% inflation target. The Fed could update its Taylor rule in recognition of the declining neutral rate, but frequent updates in the rule would sacrifice the predictability of monetary policy that Taylor and Ryan say is the justification for their proposal.

The Taylor rule would also hamstring the Fed when the economy is trapped at the zero lower bound on interest rates, as it has been for the last seven years. If the Taylor rule suggests a negative interest rate but zero is the best the Fed can do, what is our monetary policy? The targeting rule suggests a sensible answer to that question: if the economy is still in recession with inflation falling further below target, and the Fed's main instrument is no longer usable, try using some unconventional policies. Hence QE1, QE2, and QE3. When the economy recovers sufficiently (as the Fed seems to think it is), return to using the federal funds rate as the instrument.

All of this is to say that I don't think much of the Republican candidates' views on monetary policy. It's bad enough that their statements seem to be calculated to play to the paranoid tendencies of the Republican base. At least one could hope that when it's time to govern an elected Republican leader could put aside campaign rhetoric in favor of sensible monetary policy. It's more worrying to know that the economists who are advising the candidates behind the scenes, and who would probably be brought into policy-making positions if a Republican were actually elected, are pushing flawed policies based on mistaken analysis of the performance of monetary policy over the last 20 years.

Two interesting articles on the Fed's management of the federal funds rate

noreply@blogger.com (Char Weise) — Fri, 06 Nov 2015 20:58:00 +0000

I've been discussing the new institutional features of the federal funds market in my classes for a couple of years now. Here's an article in the Journal of Economic Perspectives that covers this ground in much the same way I've been doing and that I'll be sure to assign in the future.

Marvin Goodfriend asks the question I have often asked about a strange quirk in the federal funds market that makes it unnecessarily difficult for the Fed to manage the federal funds rate. Banks and some government-sponsored enterprises (GSE's) like Fannie Mae and Freddie Mac hold reserve balances at the Fed. Since 2008 banks earn interest on their reserve holdings - currently the interest rate on excess reserves and required reserves is 0.25 percent. GSE's, however, do not earn interest on their balances. Hence GSE's lend their reserves to banks, which then take the interest payments from the Fed. The federal funds rate then is between zero (the interest that GSE's earn on reserves) and 0.25 percent (the interest that banks earn). When it comes time to increase interest rates, the Fed plans to do this by increasing the interest it pays on reserves. But this won't necessarily have a predictable effect on the fed funds rate if the interest paid to GSE's stays at zero. So the Fed has introduced an new and experimental facility, overnight reverse repurchase agreements, that gives GSE's an alternative place to lend their reserves. By raising the reverse repo rate and the interest on reserves rate simultaneously, the Fed can target the fed funds rate rather precisely within the range created by those two interest rates.

To which I have always asked, why doesn't the Fed either deny GSE's the right to hold deposits at the Fed or allow them to earn interest on those reserves like the banks do. This would allow the Fed to fix the fed funds rate precisely at the interest on reserves. Goodfriend is just as puzzled as I am:

"One wonders why and when the government authorized, and the Fed accepted, non-depository institution balances in the first place given that non-depositories have no role in the payments system and no need or reason to hold balances at the central bank. Has the Fed ever requested legislation to fix the interest on reserves floor for the federal funds rate? We don't know."

But surely somebody knows!

Views on negative interest rates

noreply@blogger.com (Char Weise) — Sun, 01 Nov 2015 15:41:00 +0000

In December 2008 the Federal Reserve reduced its target for the federal funds rate, its main policy tool, to a range of zero to 0.25 percent. In doing so, says the conventional analysis, the Fed exhausted its conventional policy tools since interest rates cannot fall below zero, and was forced to resort to more novel methods of stimulating the economy such as large scale asset purchases.

The conventional analysis is not exactly correct, however, as commentators and Fed officials are increasingly acknowledging. The federal funds rate has been trading at around 0.14 percent, propped up by the Fed's decision to pay interest on bank reserves at a rate of 0.25 percent. If the Fed were to reduce the interest on reserves to zero, the fed funds rate would be squeezed to zero as well. In fact the Fed could impose a negative interest rate on reserves, equivalent to charging banks to hold reserves at the Fed. This would increase the incentive of banks to make loans rather than keeping reserves idle, the same logic behind reducing the federal funds rate in normal times.

Another bit of conventional wisdom is that it would be impossible to reduce the federal funds rate below zero because banks would hold reserves as currency in their vaults rather than hold balances at the Fed. The implicit zero interest rate on currency creates a "zero lower bound" on interest rates in general. Under current institutional arrangements there probably is a lower bound on interest rates, but it is probably below zero. Currency is costly to store and subject to theft. Reserve balances, Treasury securities, and other very liquid non-cash assets can be used more easily than cash in large financial transactions. Hence banks might be willing to hold balances at the Fed even if there was a small charge. Last year the European Central Bank reduced the deposit rate on bank reserves to -0.20 percent, and there was no dramatic outflow of reserves from the ECB (though to be fair the amount of reserves banks hold at the ECB is much smaller than the amount held at the Fed because the ECB has not engaged in large scale asset purchases at the same scale as the Fed).

So why doesn't the Fed at least reduce the interest on reserves to zero in order to push the federal funds rate down? In her confirmation hearings in 2013 Janet Yellen suggested that this option was on the table. There is some hesitancy to do so, however, because of concern about what happens to financial markets when interest rates are zero or negative. These concerns are spelled out in a World Bank report:

Extremely low interest rates reduce bank profitability. Banks may be willing to pay interest on reserves they hold at the Fed, but people and businesses who have deposits at banks would be less willing to do so because the amount of funds at stake is much smaller. I can keep a couple of thousand dollars in my house rather than maintain a deposit at my bank, but banks are less able to maintain billions of dollars in cash hoards.
Nonbank financial institutions like insurance companies and pension funds would be very hard pressed to meet their financial obligations at zero or negative interest rates.
When interest rates are zero or negative, the traditional present value method of pricing long-term securities breaks down: at negative interest rates the present value of payments in the distant future blow up rather than shrinking to zero. Asset valuations then become much more uncertain.
Money might flow out of money market funds, which invest in safe short-term securities. There was a major panic in 2008 when a large money market fund announced that its shares had fallen below par ("breaking the buck"), forcing the Fed to respond by guaranteeing the money market funds. Another outflow from money market funds would dry up liquidity in short-term lending markets.
Banks might respond to negative interest rate by making excessively risky loans.
If interest rates remained negative for a long time, it might be necessary to redesign securities and change terms of financial contracts that were set under the assumption of positive interest rates.

I don't think any of these problems are fatal. For example, banks can restore profitability by lending out their excess reserves, which is the whole point of the Fed's reducing interest rates in the first place. Insurance companies and pension funds can raise premiums to offset lower rates of return; this is unpleasant and contractionary, but probably less contractionary from a macroeconomic standpoint than keeping interest rates unnaturally high. Economic recovery depends on banks making more loans, risky or not, so the fifth bullet point seems more like a feature than a bug. The asset valuation and money market issues seem fairly serious, but the fact that European financial markets have survived negative rates suggest that we might be able to manage as well. As regards specifically the asset valuation issue, it is unlikely that short-term interest rates will remain negative long enough to reduce the yields on long-term bonds to zero, and it is long-term interest rates (equivalently, expectations of future short-term rates in the distant future) that determine the present values of long-lived assets.

I'm not alone in thinking that the Fed's concerns about zero or negative interest rates are overblown. Alan Blinder has argued that people have had enough experience with near-zero interest rates that the money market issue is no longer relevant. He argues that the worst case outcome is that reducing the interest rate on reserves to say negative 0.25 percent does nothing to stimulate the economy, but that the $6.25 billion per year that the Fed currently pays banks becomes a $6.25 billion payment by banks to the Fed and ultimately the U.S. Treasury, which would be a win for taxpayers.

One last technical point. Richard Anderson and Yang Liu at the Federal Reserve Bank of St. Louis argue that it would be unfair for the Fed to tax bank reserves because it is ultimately the Fed rather than banks that determines the aggregate amount of reserves in the banking system. I'm not positive that fairness to the banks is a legitimate concern, but to the extent that it is this is an argument for maintaining the current interest rate on required reserves and only imposing a tax on excess reserves. As banks make loans to avoid the tax on excess reserves, bank deposits increase, raising the amount of required reserves. While the Fed controls the total aggregate amount of reserves in the banking system, lending by banks converts reserves from excess to required. Once banks have fully "lent out" their excess reserves they will have avoided the tax on reserves entirely.

My, that's a hawkish statement

noreply@blogger.com (Char Weise) — Fri, 30 Oct 2015 15:50:00 +0000

The press release following the Federal Open Market Committee meeting on Wednesday is considerably more hawkish than September's statement, strongly suggesting that the Fed will begin raising interest rates in December.

The Wall Street Journal has the annotated statement here. Here are what I see as the most important changes from September to October:

~~"Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, t~~The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate."

The reference is to the slowdown in China's economy and the global downturn in commodity prices. Emerging market economies are hurting, which reduces U.S. exports to those countries. China and other countries have responded by allowing their currencies to depreciate against the dollar; the strong dollar is reducing net exports further and pushing inflation down here. The Fed does not seem to be as concerned about these developments now as it was in September. It's not clear to me what makes the Fed more optimistic. A few weeks ago China reported better GDP growth than previously forecast, but nobody believes China's GDP figures anyway.

"In determining ~~how long to maintain~~whether it will be appropriate to raise thise target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation."

This is a clear sign that the intended date of liftoff is December, not some ambiguous date in the future.

"The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."

There is no change in the language between September and October here. But I find this to be a remarkable statement. "Reasonably confident" is a very low threshold for action, such a low threshold that it could be characterized as alarmist. I think the Fed's policy should be not to raise rates until it sees the whites of inflation's eyes. Back in the early 1990's people were calling on the Fed to raise interest rates as the unemployment rate fell below 6 percent. Alan Greenspan made the decision to wait and see if low unemployment actually triggered a rise in inflation before raising rates. The result was the best performing economy in a generation. Janet Yellen should adopt the same strategy today.

Today in economic news and analysis

noreply@blogger.com (Char Weise) — Mon, 19 Oct 2015 21:02:00 +0000

There are two interesting pieces in the Financial Times, behind a paywall unfortunately so I'll summarize them.

Sam Fleming, "Big tent proves too small for US Federal Reserve": There's a divide among policymakers at the FOMC. Janet Yellen has so far been siding with the inflation hawks, emphasizing that the Fed will probably raise the fed funds rate in its December meeting. Now doves are raising public objections. Governors Lael Brainard and Daniel Tarullo have publicly called for keeping the fed funds target constant until the economy strengthens. This dissent from governors (as opposed to Fed bank presidents) is unusual. The author calls for Yellen to stop trying to reach consensus at the FOMC, because this has resulted in a muddled message. Instead, she should side with one faction or the other - probably the doves given recent weak data - and accept some dissents on FOMC votes in exchange for a clearer message to market participants.

Gabriel Wildau, "Growth data buoy China at 'pivotal moment' in economic rebalancing:" China reported third quarter growth of 6.9 percent, an unexpectedly strong number given recent concerns about a slowdown. The data show strong growth in consumption and services. On its face this is good news for the Chinese economy - everyone recognizes that sustainable growth requires more household spending and smaller trade surpluses. But many analysts are skeptical of the data. The Chinese government has a history of manipulating economic data. In this case, it is strange that service growth has been so strong, since earlier in the year growth in services was driven by strong growth in financial services. The stock market crash has reduced the contribution of financial services, and it's unlikely that other services have jumped up enough to make up the slack.

Here is Governor Brainard's speech. She concludes: "We should not take the continued strength of domestic demand growth for granted. Although the outlook for domestic demand is good, global forces are weighing on net exports and inflation, and the risks from abroad appear tilted to the downside. Our economy has made good progress toward full employment, but sluggish wage growth suggests there is some room to go, and inflation has remained persistently below our target. With equilibrium real interest rates likely to remain low for some time and policy options that are more limited if conditions deteriorate than if they accelerate, risk-management considerations counsel a stance of waiting to see if the risks to the outlook diminish."

Articles for 10-9-15

noreply@blogger.com (Char Weise) — Fri, 09 Oct 2015 15:17:00 +0000

How much does dollar appreciation affect GDP growth? A study by the New York Federal Reserve concludes:

"Our analysis shows that a 10 percent appreciation in one quarter shaves 0.5 percentage point off GDP growth over one year and an additional 0.2 percentage point in the following year if the strength of the dollar persists."

Bruce Bartlett argues that one reason the Fed is considering raising interest rates despite low inflation is "simply to get its conservative critics off its back."

Minutes of the September FOMC meeting are up. I haven't looked at them, but there's been a lot of commentary. It might be worth seeing if there's more information that we aren't aware of about why the FOMC decided not to raise rates in that meeting.

Remember those concerns about what would happen to the dollar and interest rates if China sold U.S. securities? Well China is doing it now: since March 2014 China has reduced its U.S. debt holdings by $180 billion. The concern was that this would cause U.S. interest rates to rise and the dollar to depreciate. Obviously this has not happened.

Is there a bubble in emerging markets?

noreply@blogger.com (Char Weise) — Thu, 08 Oct 2015 12:10:00 +0000

The New York Times reports that the IMF has been raising warning flags for the last year that emerging market economies are vulnerable.

In other news, a new study by JP Morgan Chase finds that the recent drop in gas prices has stimulated consumer spending. The study finds that savings from lower gas prices in 2014 amounted to one percent of monthly income for middle income households. Individuals spent 80 percent of the savings from low gas prices, a finding that contradicts surveys of households that suggest they use most of the savings to reduce credit card debt and otherwise increase savings.

Gavin Davies has an interesting analysis of recent data in today's Financial Times (unfortunately you have to pay to see the article, but maybe there are hard copies of FT floating around somewhere). He points out that last Friday's employment data have convinced financial markets that the economy is slowing enough to dissuade the Fed from raising interest rates in December. The implied probability of a 25 basis point increase in the federal funds rate based on the fed funds futures market fell from 76 percent to 40 percent on the news. But Davies thinks the slowdown is only temporary, and he thinks the Fed thinks so as well. He concludes:

"So is the US slowdown for real? Yes, but it is not yet very severe — and some of it is the result of the temporary inventory correction, and some to the rising dollar. Unless it grows worse in the next few weeks, it is unlikely to dislodge the Fed from the path it has now firmly chosen."

Finally, some interesting data and charts from the Federal Reserve Bank of Atlanta. Here is the FRB Atlanta's "spider chart" of labor market indicators, where outward movement of each of the indicators shows improvement in labor market conditions. The chart shows that by some indicators (e.g. unemployment rate and job openings rate) the labor market has rebounded to or beyond pre-recession levels, but by others (e.g. job finding rate and part-time employment) recovery is still incomplete. Here is the FRB Atlanta's "nowcast" of third quarter GDP, predicting 1.1 percent growth (more pessimistic than blue chip forecasters).

Economic releases this week

noreply@blogger.com (Char Weise) — Wed, 30 Sep 2015 16:39:00 +0000

Bloomberg has the complete economic calendar for this week. Here are some of the most important ones:

Personal income and outlays

Consumer confidence

ADP employment report

Chicago PMI

PMI Manufacturing

ISM Manufacturing

Construction spending

Employment situation

"Big US Banks Lose Patience with the Fed"

noreply@blogger.com (Char Weise) — Mon, 28 Sep 2015 13:53:00 +0000

That's the headline for this article from the Financial Times (sorry, it's behind a paywall). The story is that big US banks, which have been hoarding funds in short-term securities in anticipation of profiting from an increase in interest rates, have responded to the Fed's decision to keep the federal funds rate at its current low level by moving into longer-term assets such as Treasury bonds and agency bonds (bonds issued by Fannie Mae and Freddie Mac). The tone of the article is one of disappointment that banks have been driven to this action: Yellen's action has "worsened the outlook" for US banks; the consensus in the banking community is "give up on the Fed." The article concludes with a quote from one banker: "Bankers are starting to say, we can't run these institutions based on hopes for higher rates, so let's figure out what we can do."

The irony, of course, is that getting banks to move out of short-term assets and into long-term assets is precisely the aim of expansionary monetary policy. As banks buy long-term bonds, bond yields fall, stimulating investment. Bankers may be frustrated and disappointed that the Fed has shown that it is not going to bend over backwards to boost their profits, but the rest of us ought to be pleased by this development.

One more thing: the fact that banks are reacting to the Fed's decision by buying long-term bonds suggests that they do not see this action as inflationary. This is another indication that the Fed did the right thing; and also that Janet Yellen's recently-voiced concerns that the Fed will have to raise rates by the end of this year to head off an "unanchoring" of inflation expectations are unfounded.

The Economist calls for nominal GDP targeting

noreply@blogger.com (Char Weise) — Sat, 26 Sep 2015 18:26:00 +0000

The article is here. Our Fed Challenge team made a proposal similar to this in 2014, tailored more specifically to the then current economic conditions. Specifically, we proposed that the Federal Reserve pledge not to raise the federal funds rate until nominal GDP reached a target path based on its pre-2008 trend. This would involve several years of excess growth, excess inflation, or both, before policy was normalized. We were agnostic about whether to continue with GDP targeting at that point or to return to an inflation target; the Economist proposes making nominal GDP targeting a permanent policy framework.

I've been thinking lately that there's another appeal to nominal GDP targeting. As more and more of the economy takes the form of online entertainment and services, real GDP and inflation become more and more difficult to measure. Take Facebook as an example. Facebook undoubtedly contributes to U.S. GDP. It is a good (or a service? even that question is hard to answer) that provides benefits to millions of people from entertainment to communication. The value of the services that Facebook delivers have to be included in GDP. But how many "Facebooks" were produced in 2015? What is the price of "a Facebook"? These are impossible questions to answer. We do have some idea, however, of how much nominal income was generated by Facebook: this is just the revenue that it generated through advertisement and the like. Revenue is just quantity times price, so while we can't measure quantity (real GDP) or price (the price level) separately, we have a pretty good idea of the product (nominal GDP).

Actually this is an argument for targeting nominal Gross Domestic Income rather than Gross Domestic Product. The two are identical in principle (one person's purchases is another's income) but in reality they are bound to deviate because of measurement error. If the measurement error is small it doesn't matter which the Fed targets. Interestingly, though, the difference between the two magnitudes seems to have increased since the beginning of the information and communications technology revolution around 1980.

Worthwhile readings for 9/23

noreply@blogger.com (Char Weise) — Wed, 23 Sep 2015 19:57:00 +0000

Paul Krugman on Willem Buiter

FRB Atlanta, a new measure of slack in the labor market

Bauer and McCarthy at the FRB San Francisco: market-based forecasts of inflation do a poor job of predicting actual inflation

Productivity growth and interest rates

noreply@blogger.com (Char Weise) — Thu, 17 Sep 2015 13:07:00 +0000

Tim Duy:

Bottom Line: Fed policy increasingly reflects the view that the productivity growth slowdown is real. We see it in falling estimates of potential GDP growth, falling expectations for the terminal federal funds rate, and now we see it as a reason to anticipate low wage growth. The first and third reactions seem to have had a hawkish impact on policy - not only is low wage growth not an impediment to raising rates, but San Francisco Federal Reserve President John Williams argued the Fed needs to engineer a substantial slowdown in growth next year. But the FOMC has yet to act on that relative hawkishness; to date they have moved in the direction of market participants. Indeed, while I suspect the odds favor a September hike, we don’t even know they will raise rates this year at all! The question is whether they would be quick to act on that hawkishness in the face of any unexpectedly high inflation or wage growth numbers. I am thinking low-productivity growth coupled with memories of the 1970s may prime FOMC members in that direction.

What's happening in China?

noreply@blogger.com (Char Weise) — Wed, 16 Sep 2015 15:25:00 +0000

Planet Money, September 10

Also:

China's Forex Reserves Fall by Record $93.9 Billion on Yuan Intervention
Wei, Lingling and Trivedi, Anjani, Wall Street Journal (Online), September 7

China's foreign exchange reserves plunged by a record amount in August, underscoring the strain endured by the country's central bank as it intervened intensely to prop up the yuan.

The People's Bank of China said Monday that its reserves fell by $93.9 billion, the biggest ever monthly drop in dollar terms and the largest in percentage terms since May 2012. The decline in China's foreign currency reserves has accelerated, deepening a trend that illustrates the pressures of the country's slowdown, rising capital outflows and expectations for monetary tightening in the U.S.

China used its reserves to stabilize the yuan after the central bank devalued the currency on Aug. 11, a move that heightened worries about growth in the world's second largest economy and sparked a sharp selloff across global stock markets.

At $3.56 trillion as of the end of August, the currency reserves held by the PBOC still account for nearly one third of all holdings by central banks worldwide. But the reserves have declined since a peak of nearly $4 trillion in June 2014 as more money leaves the country "It's a new normal," said Larry Hu, an economist at Macquarie Group Ltd., a Sydney based investment bank.

The reversal raises some concerns in the U.S. government bond market because about 40% of China's foreign exchange reserves are held as Treasurys, according to estimates by analysts at Bank of America Merrill Lynch. As of June, China was the world's largest investor in Treasurys, holding $1.27 trillion, according to the latest data from the Treasury Department.

Although Treasury yields remain low by historical standards, they could become elevated if selling pressure from China intensifies, some market watchers say. Bond yields rise when prices fall.

For years, companies and investors poured money into yuan assets in China, hoping to gain not only from a rapidly growing economy, but also from a currency that was set for appreciation rising more than 30% in the past decade. Those bets have been upended both by the yuan devaluation and signs of a deepening economic slowdown .

China on Monday revised its 2014 growth rate to 7.3% from 7.4% due to a weakerthan reported contribution from the service sector, a relatively small change but one that suggests that China's effort to meet its official growth target of about 7.5% last year was tougher than it seemed.

The declines in China's reserves contributed to a drop in central bank holdings worldwide in the first quarter of this year to $11.43 trillion, according to the International Monetary Fund, from a peak of $11.98 trillion in mid2014.

In a report issued last week, analysts at Deutsche Bank AG likened the fall in global reserves to "quantitative tightening," saying shrinking reserves could result in higher bond yields, drive up market borrowing costs and challenge the ability of some central banks to exit from easy money policies. The Federal Reserve is poised to raise interest rates in the coming months, which has spurred the dollar to strengthen against many emerging market currencies.

The reserves decline represents "an additional source of uncertainty in the global economy," the bank's analysts wrote. China's capital outflows over the past three to four quarters "are unprecedented," said Nikolaos Panigirtzoglou, global market strategist at J.P. Morgan in London. "There could potentially be even more over the coming year, as the market tries to gauge the extent of the devaluation of the Chinese currency."

However, he said a fall in China's reserves shouldn't necessarily affect U.S. interest rates as money leaving China "doesn't disappear." As companies sell their yuan, they typically put their dollars in a bank, and the banks often buy U.S. government bonds with the money, Mr. Panigirtzoglou said. The strengthening dollar has also drawn more investors into Treasurys.

Some analysts say sales by China could be why Treasury prices haven't shot up even though share prices have tumbled. Between Aug. 20 and 24, the S&P 500 fell 9%, but the yields on the benchmark 10year Treasury fell 0.12 percentage point, a modest move given the broad market tumult. On Friday, the 10year yield was 2.128%, well above lows hit in February.

"The inability of Treasury yields to decline despite a sizable risk off shock is likely linked to the sales of Treasury securities by the PBOC," David Woo, the head of global interest rates and currencies research at Bank of America Merrill Lynch, wrote in a report last week.

However, China's holdings of U.S. Treasurys haven't shown signs of decline yet. As of the end of June, the country sat on a total of $1.27 trillion, up from $1.24 trillion at the end of 2014, according to the latest Treasury report. Many market observers believe the selling was partly conducted through Belgium, which is home to Chinese custodian accounts.

Also supporting Treasurys are purchases by bond funds, as investors have flocked to haven investments during the recent market volatility.

Another reason China's reserves have fallen is a push by Chinese companies and foreign companies operating in China to pay down dollar debt. China's reserves, which include a basket of global currencies and other assets, have also lost an estimated $20 billion on the changing value of currencies, with the euro, for instance, rising 2.3% in August against the dollar.

Emerging market countries, especially in Asia, rapidly accumulated foreign reserves in a bid to protect their economies from volatile capital flows after the 1990s, outpacing most industrialized countries. In smaller economies like Thailand, reserves account for a little over 40% of gross domestic product. China is the largest holder globally, with reserves that account for about 35% of its GDP.

That ratio has been falling over the past years, but by some measures, China's reserves give it a sufficient cushion. It has sufficient reserves to pay for 22 months of imports. Still, investors say as China turns away from an export oriented economy to one led by consumption, its foreign exchange
reserves are bound to come under further pressure.

"Capital outflow is a big concern," said an official close to the central bank. That is despite the fact that Beijing still has a big war chest to defend the yuan. Economists had estimated the drop in China's reserves in August at between $70 billion and $100 billion. Some analysts had expected outflows of as much as $150 billion.

Monday's data "on China's foreign exchange reserves suggest that the People's Bank is not burning through its reserves as quickly as many had believed," said Julian Evans Prichard, China economist at Capital Economics.

He calculates that around $130 billion worth of funds were moved out of China in August, up from his estimate of $75 billion in outflows in July.

The central bank has resorted to two strategies to try to stem the yuan from falling further, according to people familiar with the matter. First, before the opening of daily trading, the central bank has been providing state owned banks, which report yuan price levels to the central bank, with "window guidance" on a yuan price that meets the comfort levels of the PBOC.

Secondly, the central bank has been directly intervening in the currency market by buying the yuan and selling dollars to prevent the yuan from falling too much. Analysts from Deutsche Bank estimated that the central bank spent up to $50 billion on interventions on Aug. 12, 26 and 28.

The intervention also has had the effect of draining yuan funds out of the market threatening to cause a shortage of funds at Chinese banks. As a result, the central bank in late August decided to release more than $100 billion in funds for banks to lend.

More views on the possibility of a rate hike

noreply@blogger.com (Char Weise) — Tue, 15 Sep 2015 20:45:00 +0000

Tim Duy, Bloomberg, Why the Fed is Likely to Stand Pat This Week

Jeff Lacker, FRB Richmond, The Case Against Further Delay

Jan Hatzius, Goldman Sachs (video)

One might reasonably ask why it's so important whether or not the Fed increases interest rates by a measly 25 basis points on Thursday - a quarter of a point difference in interest rates surely won't have any effect on inflation. But I think it is important, because whether or not the Fed raises rates this week gives us information about the Fed's priorities that shapes expectations of future rates and the health of the economy. For the last year and a half we (I at least) have been operating on the assumption that the Yellen Fed is basically dove-ish on inflation: I believe Janet Yellen when she says that the FOMC needs to see significant improvement in the labor market and no deterioration in inflation or inflation expectations before it raises interest rates. If the Fed raises rates this week, we (or at least I) will have to conclude that the Lacker wing of the FOMC, which believes that it sees signs of inflation in the data not visible to mortal eyes, and that the Fed has an obligation to prevent "froth" in financial markets (also not visible to mortal eyes), has much more power than I had earlier thought. We/I will then project not a very slow increase in interest rates beginning perhaps in 2016 and conditioned on things like employment growth and wages, but a more deliberate increase in rates impervious to real economic indicators beginning right now. The difference in the time path of interest rates can have a large (maybe 100 basis points or more based on my back-of-the-envelope guesses) impact on long-term interest rates. A tightening this week, if understood as ultimately slowing down the pace of recovery, could also have an adverse impact on consumer and business confidence and risk premia. The combination of higher long-term risky interest rates and decreased confidence could have a substantial impact on the economy. Raising rates now is too risky; the Fed needs to wait, not until later this year but until we see actual signs of "firming" labor markets and rising wages and prices.

What is Keynesian economics?

noreply@blogger.com (Char Weise) — Tue, 15 Sep 2015 19:38:00 +0000

From Paul Krugman:

Attacks on Keynesians in general, and on me in particular, rely heavily on an army of straw men — on knocking down claims about what people like me have predicted or asserted that have nothing to do with what we’ve actually said. But maybe we (or at least I) have been remiss, failing to offer a simple explanation of what it’s all about. I don’t mean the models; I mean the policy implications.

So here’s an attempt at a quick summary, followed by a sampling of typical bogus claims.

I would summarize the Keynesian view in terms of four points:

1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn’t enough spending. Such episodes can happen for a variety of reasons; the question is how to respond.

2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain.

3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by “printing money”, using the central bank’s power of currency creation to push interest rates down.

4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close to zero. In that case temporary deficit spending can provide a useful boost. And conversely, fiscal austerity in a depressed economy imposes large economic losses.

Is this a complicated, convoluted doctrine? ...

But strange things happen in the minds of critics. Again and again we see the following bogus claims about what Keynesians believe:

B1: Any economic recovery, no matter how slow and how delayed, proves Keynesian economics wrong. See [2] above for why that’s illiterate.

B2: Keynesians believe that printing money solves all problems. See [3]: printing money can solve one specific problem, an economy operating far below capacity. Nobody said that it can conjure up higher productivity, or cure the common cold.

B3: Keynesians always favor deficit spending, under all conditions. See [4]: The case for fiscal stimulus is quite restrictive, requiring both a depressed economy and severe limits to monetary policy. That just happens to be the world we’ve been living in lately.

I have no illusions that saying this obvious stuff will stop the usual suspects from engaging in the usual bogosity. But maybe this will help others respond when they do.

and Mark Thoma:

I would add:

5. Keynesian are not opposed to supply-side, growth enhancing policy. They types of taxes that are imposed matters, entrepreneurial activity should be encouraged, and so on. But these arguments should not be used as cover for redistribution of income to the wealthy through tax cuts and other means, or as a means of arguing for cuts to important social service programs. Not should they be used only to support tax cuts. Infrastructure spending is important for growth, an educated, healthy workforce is more productive, etc., etc. Economic growth is about much more than tax cuts for wealthy political donors.

On the other side, I would have added a point to B3:

B3a: Keynesians do not favor large government. They believe that deficits should be used to stimulate the economy in severe recessions (when monetary policy alone is not enough), but they also believe that the deficits should be paid for during good times (shave the peaks to fill the troughs and stabilize the path of GDP and employment). We haven't been very good at the pay for it during good times part, but Democrats can hardly be blamed for that (see tax cuts for the wealthy for openers).

Anything else, e.g. perhaps something like "Keynesians do not believe that helping people in need undermines their desire to work"?

The only thing I would take issue with is the caveat that fiscal policy is only called for when monetary policy is ineffective. This is not an essential component of Keynesianism. Keynesians believe that both fiscal and monetary policy are generally of use in fighting downturns, each having its advantages and disadvantages in different situations. The zero lower bound is just one case when fiscal policy has the clear advantage.

Analysis of China's economy

noreply@blogger.com (Char Weise) — Tue, 15 Sep 2015 15:36:00 +0000

China Economic Watch

Should the Fed raise rates next week? Some opinions:

noreply@blogger.com (Char Weise) — Mon, 14 Sep 2015 22:24:00 +0000

Tim Mullaney, MarketWatch

Larry Summers on CNBC

Tyler Cowen, Marginal Revolution

William Cohan, New York Times

Andrew Levin, VOX

Editorial, Los Angeles Times

Economic reports for week of 9/14-18

noreply@blogger.com (Char Weise) — Mon, 14 Sep 2015 11:56:00 +0000

Wall Street Journal, 5 Things to Watch.

Some readings on the role of economic history in economics

noreply@blogger.com (Char Weise) — Mon, 31 Aug 2015 22:45:00 +0000

Robert Solow, "Economic History and Economics," 1985

Kevin O'Rourke, "Why Economics Needs Economic History," 2013

Carolina Journal, "Friday Interview: The Importance of Economic History," 2010

Just proud of my heritage

noreply@blogger.com (Char Weise) — Mon, 29 Jun 2015 19:20:00 +0000

The other day while taking a stroll in the neighborhood I ran into a neighbor of mine - from somewhere in the south I think, judging from his dress and accent. I greeted him in the usual way: I smiled, bade him a cheery good afternoon, then extended the middle finger of my right hand and thrust my arm in the air in front of his face, bracing the crook of my elbow against my left hand for emphasis.

"What the hell was that for?" he exclaimed.

"Nothing," says I, "what's the matter?"

"What do you mean what's the matter? You just said 'f*** you' to me. Do it again and I'll shove that finger down your throat."

I was flustered and confused. But after he explained his side to me I understood his point a little better. "Oh," I said, "you're really just misinterpreting my gesture. You see, I am very proud of my little finger, proud of the hand it extends from, proud of the arm to which both are attached. I inherited it from my pappy, and my pappy's pappy before him. You can't stop me from celebrating my heritage."

My neighbor was not convinced. "Everybody knows what that symbol means, and I think I know exactly what you meant when you flipped it at me. And I'm not happy about it. I'm about mad enough now to rip that finger off your scrawny little hand."

Well, it didn't get any better from there, but I managed to get away with both fingers intact. I really don't understand people who object to the way I greet them. They can't tell me what I mean and don't mean by that gesture. And I'm not responsible if they're offended by it for some crazy reason. I hear there are people who want to stop people like me from flipping them off every day. Well that ain't gonna happen - it's a free country after all.

Dear Conservatives: Relax, everything will be o.k.

noreply@blogger.com (Char Weise) — Sat, 27 Jun 2015 14:49:00 +0000

I know you're hurting now. The last week has been a tough one for conservatives: there's a stampede to take Confederate flags down from public places, Obamacare survives its last serious legal challenge, same sex marriage is legalized around the country. And all of this on the heels of the Pope coming out for action on climate change! As thrilled as liberals are by these turns of events, we understand what you conservatives are going through right now.

We understand because we have been there ourselves. We too have cried out in anguish at Supreme Court decisions that we thought would do great damage to our lives and our freedoms and our democracy. But we survived, America survived, and you will too.

Remember when the Supreme Court ruled that the Second Amendment guaranteed an individual right to bear arms, and liberals were worried that we'd never have effective gun control legislation and there would be more and more mass slaughters of innocents? Well... O.k., bad example. How about this one: remember when the Supreme Court ruled that corporations and billionaires could spend unlimited amounts of money to influence elections, and we were all like "Great, now the only viable candidates are going to be people backed by billionaires and corporations!" Crap, another bad example. O.k., let's go back a few years: remember when the Supreme Court declared that Florida couldn't recount the ballots and so George Bush was president, and we worried that we'd be saddled with illegal wars and disastrous economic policies? Man, this isn't going anywhere, is it? Let me try a different tack.

My point is, conservatives have always hyperventilated about how this or that social or political change was going to destroy America as we know it, but after a few years you've always gotten over it. Remember when FDR created Social Security and this was the end of freedom and capitalism? Remember when LBJ created Medicare and Ronald Reagan hit the airwaves telling us this was socialized medicine and one day we'd have to explain to our grandchildren how this used to be a free country? It didn't turn out that way, did it? Now we're pretty much all appreciative of the retirement security these programs offer, and even if we don't like some of the details we don't think they've permanently destroyed American capitalism. In fact, I'd hazard to say that there is no bigger fan of socialized medicine than a Tea Partier on Medicare.

Remember when Congress passed civil rights legislation that outlawed discrimination in public accommodations and in employment on account of race? Milton Friedman, Barry Goldwater, and William F. Buckley said that to tell a businessman whom he could or could not serve, whom he could or could not employ, was a fatal violation of liberty. Don't they look a little silly now? Don't you feel a little silly now for believing them?

Remember Women's Lib? Feminists wanted equal rights, an end to discrimination in employment and education, a larger voice for women in the public sphere. You said if we did this we'd all have to use the same bathrooms and that would destroy America as we know it. Sounds kind of dumb now, doesn't it? You can't believe you once thought that! And now there are female conservative governors and Senators all over the place. They've come a long way, baby, and so have you!

Well, same thing with the latest liberal victories. The Supreme Court has confirmed once again that Obamacare is the law of the land. You think this piece of legislation is going to destroy America, or that it already has. Really? Take a deep breath and recognize that - if you're like the vast majority of Americans - the health insurance you have now is basically the same as the health insurance you had before Obamacare. Maybe it covers some stuff you don't want it to cover, maybe it costs a bit more because of that. But overall costs are down, businesses are no longer in a panic about whether they can afford health care for their employees, people are no longer going bankrupt (as often) because they can't pay their medical bills, more people are getting access to health care than ever before. Maybe you don't like certain features of the law, and that's o.k. But it's not the end of life as you know it. You are going to be just fine.

Are you really that concerned that removing the Confederate flag represents "political correctness" run amok, and now it's open season on all symbols that the liberal elite disapprove of? A little perspective is in order. You can still display the Confederate flag on your bumper sticker, your tee shirt, your mud flaps, your upper arm. You can fly the flag from your porch and nobody's going to stop you. You just can't expect us all to have to look at the thing in front of public buildings, that's all. Sure, you can't buy the flag at Walmart anymore, but I assure you you'll find a way to get your hands on one - the fact that Walmart doesn't sell porn doesn't stop you from adding to your collection of Hot Chicks With Guns videos, does it? If you're one of those people who sees the flag as a proud symbol of white supremacy, relax once again: you can hate who you want in the privacy of your own home, you just can't expect the rest of us to join in your expression of hatred.

And finally, same sex marriage. Dang, this one's got to hurt. But again, take a deep breathe and realize that the fact that the gay couple down the block just got married has no impact at all on your marriage. None at all. When you see a gay couple in the grocery store, you won't be able to tell if they're married or not, or in most cases whether they're actually gay at all. It just doesn't matter! You can go on with your life exactly as you always have! Now, if you're one of the six Americans who own a bakery and believe that making a wedding cake for a gay couple is some kind of major violation of your religious principles, you may have a dilemma on your hands. To bake or not to bake? Here's my suggestion: write "Congratulations Adam and Steve" on the top of the cake just like they want it. Hand it to them in a nice box, take their money, smile, tell them congratulations and have a nice day. Afterwards you can go into the back room and mutter about sin and fornication under your breath to your heart's content. Or better yet, go into the back room and reflect on the smile on that couple's face, and how you contributed a little bit to creating a nice experience for them, and that if you added a bit today to the amount of happiness and love in the world, how could any God think of that as a bad thing? Let your heart grow a little.

Now is there a slippery slope? Does recognizing same sex marriage, taking down the Confederate flag, or validating Obamacare set us up for more controversy in the future? You bet it does. There will always be new mountains to climb and battles to fight, and we will engage all of those issues in time. But nothing fundamental has changed. The America you woke up to today is the same America you fell asleep in last night. Years from now you will look back at the anguish you felt this week and wonder why you ever thought it would be such a big deal. For now, just relax, everything will be o.k.