On Other Blogs, Other Wonders

Some links for Nov. 1:

A few links

This Friday, November 6, Mike Konczal and I will be releasing the next piece of the Roosevelt Institute Financialization Project, two reports on “short-termism” in American corporations and financial markets. One report, written by me, is a followup to the Disgorge the Cash report from this spring, addressing a bunch of the most common objections to the argument that pressure for high payouts is undermining investment. (Some of this material has appeared here on the blog, but a lot of it is new.) The other report is a ten-point policy proposal for addressing short-termism, written by Mike, me, and my former student Amanda Page-Hongrajook. There will be an event for the release in DC, featuring Senator Tammy Baldwin. Hopefully it will get some attention from policymakers and the press.

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I was pleased to see this new paper from the central bank of Norway, which draws on my work with Arjun Jayadev  on debt dynamics. The key point in the Norges Bank paper is that we have to think of debt as evolving historically, not chosen de novo in response to the current “fundamentals.” More concretely: given significant debt inherited from the past, an increase in interest rates will lead to higher, not lower, debt. The shorthand that change in debt is the same as new borrowing, is not a reliable guide to the historical evolution of leverage.

From the paper:

Macroeconomic models typically assume that households refinance their debt each period … with the implication that the entire stock of debt responds swiftly to shocks and policy changes. This simplifying assumption might be useful and innocuous for many purposes, but cannot be relied upon in the current policy debate, where a central question regards if and how monetary policy should respond to movements in household debt. The likely performance of such policies can only be evaluated within frameworks that realistically account for debt dynamics. …

The evidence that perhaps most convincingly points toward the need for distinguishing between new borrowing and existing debt, is the empirical decomposition of US household debt dynamics by Mason and Jayadev (2014). They account for how the “Fisher” factors inflation, income growth and interest rates have contributed to the evolution of US debt-to-income, in addition to the changes in borrowing and lending, since 1929. Their findings clearly show how the dynamics of debt-to-income cannot be attributed to variation in borrowing alone, but has been strongly influenced by the Fisher factors, and often has gone in the opposite direction of households’ primary deficits. …

Discussions of household debt tend to implicitly assume that variation in debt-to- income ratios reflect active shifts in borrowing and lending, which is misguided….  With plausible debt dynamics, interest rate changes have far weaker influence on household debt than a conventional one-quarter debt model implies. Moreover, with long-term debt the qualitative effect of a policy tightening on household debt-to-GDP is likely to be positive..

The bulk of the paper is an attempt to incorporate these ideas into a DSGE model, which I have misgivings about. But that hardly matters since they’ve so clearly grasped the important point.

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In the other-than-economics department, here’s a New York Observer article by Will Boisvert from a little while back on universal pre-K. Will is not a big fan of New York’s universal pre-K program, or of the education-based arguments used to promote it. Now, as a New York City parent of a small child, I’m very grateful that UPK exists. And I’m very impressed that the DeBlasio team were able to roll it out as fast as they did — it’s hard to think of another universal entitlement that was implemented so quickly. But Will’s central critique seems on the mark to me. UPK is primarily a benefit for parents — we should mainly think of it as publicly funded daycare. But for various reasons, it’s been sold by its contribution to the human capital formation of 4-year olds, not by the ways it makes parenthood less of a burden for working- and middle-class families. Will’s argument — and here I’m not sure I’m with him — is that this has had real costs in the way the program is structured.

(Incidentally, one of my first published pieces was a rather unfriendly article about current Observer editor Ken Kurson.)

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Over at the Angry Bear blog, the very smart Robert Waldmann has got himself worked up over the fact that real private investment has for the first times since 1947 surpassed real government consumption and investment (I > G in the language of the national income identity.) Unfortunately, there is no such fact.

“Real” I and G are index numbers; you cannot compare their magnitudes. All you can compare is dollars. And in terms of dollars, government consumption and investment, at $3.2 trillion, remains slightly higher than private domestic investment, at $3 trillion. In fact, Waldmann’s claim is almsot the opposite of the truth: the current expansion is the first one since the early 1970s in which private investment has not passed government final spending, at least not yet.

“Real” values are supposed to refer to quantities of stuff, not quantities of money. So Waldmann’s claim that real I is greater than real G is equivalent to the claim that the country is producing more kindergarten classes than steel. Talking about the change in the “real” quantity of steel, or in the “real” number of kindergarten classes, is in principle straightforward: just add up tons or bodies in classrooms, as the case may be. But how do you compare the two? Only via their prices. The problem is, the relative price of kindergarten classes and steel varies over time. So which is greater than which, and by how much, will depend on which year’s prices you use. In the case of I and G, if we use current prices, we find that G is slightly greater than I. If we use 2009 prices, as Waldmann does, we find that I is slightly greater than G. If we use, say, 1950 prices, we find that I is almost three times G. Which of these is “true”? None of them — when you’re comparing index numbers, absolute magnitudes are completely arbitrary. And again, when we compare dollar amounts, which are objective, we see that G remains comfortably above I. [1]

I’m not calling attention to this just to pick a fight. (UPDATE: Waldmann now agrees, so no fight to pick.) It’s because I think it’s revealing about the way inflation adjustment confuses people, and especially economists. Even someone as smart and critical-minded as Waldmann can get sucked into treating “real” values as objective measures of physical stuff.

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I haven’t been following the Argentine elections closely, but it seems clear that the resolution of the Argentine default is an important frontline in the war between money and humanity. So we have to be interested in whether the elections are won by the candidate promising surrender to the creditors. On the larger set of issues at stake there, I recommend this piece by Marc Weisbrot, whose stuff on Argentina is in general very good.

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There’s an interesting conversation going on about the “natural rate of interest.” Here’s one way to think about it. If the government buys enough peanuts, it can presumably raise aggregate demand to the economy to full employment, and/or to a level consistent with some inflation target. Should we call whatever peanut price results from this policy “the natural price of peanuts”? And is there any reason to think that this price, whatever it might be, will be the same as in a Walrasian economy that somehow corresponds to our own “in the absence of distortions or rigidities”? Now substitute bonds for peanuts — to talk about the natural rate of interest means answering both questions Yes.

Anyway, I think Tyler Cowen is mostly on target here.

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I was talking about econ blogs at the bar the other night, and there was a general consensus that none of us read as many of them as we used to. Maybe the econblogging moment is over? Still, there are lots of them that are worth your time, if you’re reading this. Here are a few economics blogs I’ve recently started reading regularly: Perry Mehrling; Brian Romanchuk; Marshall Steinbaum. Perry has of course been writing great stuff for decades but he’s only recently taken up blogging. So I think there’s still some life in the format.

 

[1] Altho it is striking how the trajectory of G has flattened out under Obama. 2010-2015 is the first five-year period since World War II in which there was zero growth in nominal government consumption and investment. The only reason G is still above I, is because private investment fell so steeply between 2006 and 2010. So maybe Waldmann is onto something after all?