Links for July 20, 2016

The responsibilities of heterodoxy. Arjun Jayadev and I have an ongoing project of interviewing dissenting economists who we think deserve wider recognition. Our first interview was with Axel Leijonhufvud; the second, just now up at the INET site, is with our old professor Jim Crotty. Jim’s ECO 710 was for us, as for hundreds of UMass grad students over the past 30 years, the starting point for systematically thinking about the economy as a whole. (You could think of him as sort of the Earth-II version of Rudi Dornbusch.) You can read more of my thoughts about him at the link.

Here’s an interesting clip that didn’t make it into the INET version:

The radicalism — and coherence — of Keynes larger political-economic program is a topic I’d like to return to in the future, as is the importance of an organic relationship to some broader social movement or political project. For heterodox economists, I think even more than for other academics, it’s impossible to even do good scholarship if your relationship to your object of study is only as a scholar. Science, as Max Weber says, “presupposes that what is yielded by scientific work is important in the sense that it is ‘worth being known.’ … This presupposition cannot be proved by scientific means.”


The problem with heterodoxy. The post here about the non-existence of mainstream economics is now up at Evonomics, in a somewhat improved form. While we’re on that topic, I will let loose with a peeve. Joan Robinson is like a god to me — in an anthropological sense she might even literally be a divinity for my tribe. But I hate that often-quoted line that the only reason to study economics is “to avoid being fooled by economists.” It reinforces the worst habit of heterodox people: putting negative critique above positive efforts to understand the world.


Articles to read. Three recent articles that really deserve posts of their own:

Thomas Palley on negative interest rates (he’s against them).

Jerry Epstein on the costs of big finance.

Cédric Durand and Maxime Gueuder on the weakening link between profits and corporate investment. I’ve been planning to write something on exactly this; clearly it will have to respond to this paper.


Interest rates and trade imbalances. Izabella Kaminska has a very interesting post up at FT Alphaville. (Does she write any other kind?) This one brings out two important points. First, to the extent that low interest rates mainly lead to bringing forward future spending — this is  probably especially true in housing — they are good tools for dealing with temporary downturns but not for secular shortfalls. (Kaminska doesn’t say so, but this is one reason the “natural rate” concept is misleading.) Second, the macroeconomic significance of trade imbalances depends on what happens to the corresponding financial flows — and this isn’t automatic. Continuous British surpluses in the gold standard era were compatible with steady growth of the world economy because they financed investment — in railroads especially — in the peripheral countries, using British capital goods. The general lesson is:

If countries want to carry international surpluses indefinitely the suggestion here is they need also to reinvest those “savings” into capacity expanding investments abroad.

Also in FT Alphaville, here’s a nice post by Matthew Klein on a question that should be obvious, but is seldom asked: If large current account deficits are dangerous, then what exactly is the purpose of allowing free flows of portfolio investment across borders? From the point of view of the receiving country, the only benefit of portfolio inflows is that it lets them finance current account deficits. If that’s not desirable, why allow them? Klein doesn’t give the clear negative answer that I would, but it’s the right question to be asking.


Evicted. At Dissent, my Roosevelt colleague Mike Konczal has an excellent review of two new books on eviction and foreclosure. It’s an important topic, and Evicted looks like an important book. I had some debates about it on twitter that clarified a question that doesn’t quite come out in the review itself. Are housing costs so high for more people because of market and regulatory failures that allow landlords to exploit poor tenants? Or is the cost of providing adequate housing simply greater than poor families can pay? The first points toward tenants organizing and better regulation of rental housing, the latter toward direct or indirect subsidies or direct public provision of housing.

Also from Mike, a review of two recent books about the appropriate role of the state.


Rising health costs in Europe. Via Adam Gaffney, here’s an interesting article on rising household payments for heatlh care in Europe, even in countries that are notionally single payer. Adam’s summary:

 It supports the hypothesis—put forward by many—that there has been a *partial* retreat from universal health care in Europe (especially if we define universal health care as free care at point of use for all). The main findings are as follows:

-The odds of having any out-of-pocket expenditures on health care in the previous 12 months (among 11 European nations) were 2.6 fold higher in 2013 than in 2006-2007;

-Overall out of pocket payments for health care increased 43.6% (inflation adjusted) between 2006-2007 and 2013;

-The proportion of individuals with catastrophic health care expenditures rose, particularly in Spain and Italy, which have been particularly hard-struck by austerity.

My take: We need to stop thinking about universal health care as an end goal or terminus: its actually a work in progress, and neoliberal health policy ideology has already done a number on it in Europe.


The poor stay poor. My old UMass comrade Mike Carr has a new article on income mobility, coauthored with Emily Wiemers. There’s a nice writeup of it in The Atlantic.


The right vs the rentiers? I was interested to learn that one of Theresa May’s declared priorities as Prime Minister is reforming corporate governance, including requiring worker representatives on boards. I have no idea if anything will come of it, but it’s interesting to see ideas that would be well to the left of the mainstream here adopted at least rhetorically by a conservative government in the UK. Was also interesting, in the coverage, to see some acknowledgement of the importance of cogovernance and works councils in Germany. Obviously export surpluses should not be taken as the measure of economic success in any broader sense, but it’s still worth pointing out that Europe’s biggest exporter is one of its least liberal economies.

Also in Theresa May news, doesn’t it seem like if Article 50 can’t be invoked without Scotland’s ok, that means Brexit isn’t happening? Which I think was the safe bet all along. Because if what scares you is that the “burghers of middle England” can “with a single vote destroy trillions of dollars of value,” then you can probably relax. The trillions will win the next round.

Links for June 15, 2016

“Huge foreign demand for Treasuries”. Via Across the Curve, here’s the Wall Street Journal:

The global hunger for U.S. government debt is intensifying as investors seek better returns from the negative yields and record-low rates found in Japan and Europe. On Thursday, an auction of 30-year Treasury debt attracted some of the highest demand ever from overseas buyers…

Thirty-year bonds typically attract a specialized audience, largely pension funds and other investors trying to buy assets to match long-term liabilities. There are few viable alternatives for such buyers around the world. The frenzy of buying has sparked warnings about the potential of large losses if interest rates rise. …

One auction is hardly dispositive, but that huge foreign demand is worth keeping in mind when we think about the US fiscal and external deficits. A point that Ryan Cooper also makes well.


You get the debt, I get the cash. When I pointed out Minsky’s take on Trump on this blog a few months ago, there were some doubts. How exactly, did Trump extract equity from his businesses? Why didn’t the other investors sue?  In its fascinating long piece on Trump’s adventures in Atlantic City, the Times answers these questions in great detail. Rread the whole thing. But if you don’t, Trump himself has the tl;dr:

“Early on, I took a lot of money out of the casinos with the financings and the things we do,” he said in a recent interview. “Atlantic City was a very good cash cow for me for a long time.”



Unto the tenth generation. If you are going to make an argument for Britain leaving the euro, it seems to me that Steve Keen has the right one. The fundamental issue is not the direct economic effects of membership in the EU (which are probably exaggerated in any case.) The issue is the political economy. First, the EU lacks democratic legitimacy, it effectively shifts power away from elected national governments, while Europe-wide democracy remains an empty shell. And second, European institutions are committed to an agenda of liberalization and austerity.

From the other side, we get this:

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I wish I knew where this sort of thing came from. Maybe Brexit would reduce employment in the UK, maybe it wouldn’t — this is not the sort of thing that can be asserted as an unambiguous matter of fact. Whether it’s EU membership or taxes or trade or the minimum wage, everyone claims their preferred policy will lead to higher living standards than the alternatives. Chris Bertram seems like a reasonable person, I doubt that, in general, he wishes suffering on the children of people who see policy questions differently than he does. But on this one, disagreement is impermissible. Why?


I like hanging out in coffeehouses. Over at Bloomberg, Noah Smith offers a typology of macroeconomics:

The first is what I call “coffee-house macro,” and it’s what you hear in a lot of casual discussions. It often revolves around the ideas of dead sages — Friedrich Hayek, Hyman Minsky and John Maynard Keynes.

The second is finance macro. This consists of private-sector economists and consultants who try to read the tea leaves on interest rates, unemployment, inflation and other indicators in order to predict the future of asset prices (usually bond prices). It mostly uses simple math, … always includes a hefty dose of personal guesswork.

The third is academic macro. This traditionally involves professors making toy models of the economy — since the early ’80s, these have almost exclusively been DSGE models … most people outside the discipline who take one look at these models immediately think they’re kind of a joke.

The fourth type I call Fed macro…

It’s fair to say a lot of us here in the coffeehouses were pleased by this piece. Obviously, you can quibble with the details of his list. But it gets a couple of big things right. First, the fundamental problem with academic macroeconomics is not that it’s a  study of the concrete phenomena of “the economy” that has gone wrong in some way, but a self-contained activity. The purpose of models isn’t to explain anything, it’s just to satisfy the aesthetic standards of the profession. As my friend Suresh put it once, the best way to think about economics is a kind of haiku with Euler equations. I think a lot of people on the left miss this — they think that you can criticize economic by pointing out some discrepancy with the real world. But that’s like saying that chess is flawed because in medieval Europe there were many more knights than bishops.

The other thing I think Noah’s piece gets right is there is no such thing as “economic orthodoxy.” There are various different orthodoxies — the orthodoxy of the academy, the orthodoxy of business and finance, the orthodoxy of policymakers — and they don’t agree with each other. On some important dimensions they hardly even make contact.

Merijn Knibbe also likes the Bloomberg piece. (He’s doing very good work exploring these same cleavages.) Noah follows up on his blog. Justin Wolfers rejects basically everything taught as macroeconomics in grad school. DeLong makes a distinction between good and bad academic economics which to me, frankly, looks like wishful thinking. Brian Romanchuk has some interesting thoughts on this conversation.


Are there really excess reserves? I’ve just been reading Zoltan Pozsar’s Global Money Notes for Credit Suisse. Man they are good. If you’re interested in money, finance, central banks, monetary policy, any of that, you should be reading this guy. Anyway, in this one he makes a provocative argument that I think is right:

Contrary to conventional wisdom, there are no excess reserves – not one penny. Labelling the trillions of reserves created as a byproduct of QE as “excess” was appropriate only until the Liquidity Coverage Ratio (LCR) went live, but not after. …

Before the LCR, banks were required to hold reserves only against demand deposits issued in the U.S. … As banks went about their usual business of making loans and creating deposits, they routinely fell short of reserve requirements. To top up their reserve balances, banks with a shortfall of reserves … borrowed fed funds from banks with a surplus of reserves… These transactions comprised the fed funds market.

Under the LCR, banks are required to hold reserves (and more broadly, high-quality liquid assets) not only against overnight deposits, but all short-term liabilities that mature in less than 30 days, regardless of whether those liabilities were issued by a bank subsidiary, a broker-dealer subsidiary or a holding company onshore or offshore …

The idea is this: Under the new Basel III rules, which the US has adopted, banks are required to hold liquid assets equal to their total liabilities due in 30 days or less. This calculation is supposed to include liabilities of all kinds, across all the bank’s affiliates and subsidiaries, inside and outside the US. Most of this requirement must be satisfied with a short list of “Tier I” assets, which includes central bank reserves. So reserves that are excess with respect to the old (effectively moot) reserve requirements, will not be to the extent that they are held to satisfy these new rules.

Pozsar’s discussion of these issues is extremely informative. But his “no one penny” language may be a bit exaggerated. While the exact rules are still being finalized, it looks like current reserve holdings could still be excessive under LCR. Whie banks have to hold unencumbered liquid assets equal to thier short-term liabilities, the fraction that has to be reserves specifically is still being determined — Pozsar suggests the most likely fraction is 15 percent. He gives data for six big banks, four of which hold more reserves than required by that standard — though on the other hand, five of the six hold less total Tier I liquid assets than they will need. (That’s the “max” line in the figure — the “min” line is 15 percent.) But even if current reserve holdings turn out to be more than is required by LCR, it’s clear that there are far less excess reserves than one would think using the old requirements.

Liquid assets as a share of short-term liabilities. Source: Credit Suisse
Liquid assets as a share of short-term liabilities, selected banks. Source: Credit Suisse

Pozsar draws several interesting conclusions from these facts. First, the Federal Funds rate is dead for good as a tool of policy. (I wonder how long it will take textbook writers to catch up.) Second, central bank balance sheets are not going to shrink back to “normal” any time in the foreseeable future. Third, this is a step along the way to the Fed becoming the world’s central bank, de facto in even in a sense de jure. (Especially in conjunction with the permanent swap lines with other central banks, another insitutional evolution that has not gotten the attention it deserves.) A conclusion that he does not draw, but perhaps should have, is that this is another reason not to worry about demand for Treasury debt. There are good prudential reasons for requiring banks to hold government liabilities, but in effect it is also a form of financial repression.

This is also a good illustration of Noah’s point about the disconnect between academic economics and policy/finance economics. Academic economists are obsessed with “the” interest rate, which they map to the entirely unrelated intertemporal price called “interest rate” in the Walrasian system. Fundamentally what central banks do is determine the pace of credit expansion, which historically has involved a great variety of policy tools. Yes, for a while the tool of choice was an overnight interbank rate. But not anymore. And whatever the mix of immediate targets and instruments will be going forward, it’s a safe bet it won’t return to what it was in the past.

Links for April 21


The coup in Brazil. My friend Laura Carvalho has a piece in the Times, briefly but decisively making the case that, yes, the impeachment of Dilma Rousseff is a coup. Also worth reading on Brazil: Matias VernengoMarc Weisbrot and Glenn Greenwald.


The bondholder’s view of the world Normally we are told that when interest rates on public debt rise, that’s a sign of the awesome power of bond markets, passing judgement on governments that they find unsound. Now we learn from this Bloomberg piece that when interest rates on public debt fall, that  too is a sign of the awesome power of bond markets. Sub-1 percent rates on Irish 10-year bonds are glossed as: “Bond Market to Periphery Politicians: You Don’t Matter.” The point is that even without a government, Ireland can borrow for next to nothing. Now, you might think that if the “service” bond markets offer is available basically for free, to basically anyone — the takeaway of the piece — then it’s the bond markets that don’t matter. Well then you, my friend, will never make it as a writer of think pieces in the business press.


The bondholder’s view, part two. Brian Romanchuk says what needs to be said about some surprisingly credulous comments by Olivier Blanchard on Japan’s public debt.

Anyone who thinks that hedge funds have the balance sheet capacity to “fund” a G7 nation does not understand how financial markets are organised. There has been a parade of hedge funds shorting the JGB market (directly or indirectly) for decades, and the negative yields on JGB’s tells you how well those trades worked out.


The prehistory of Trumpism. Here is a nice piece by my University of Chicago classmate Rick Perlstein on the roots of Trump’s politics in the civil-rights-backlash politics of fear and resentment of Koch-era New York. (Also.) I’ve been wishing for a while that Trump’s role in the Central Park Five case would get a more central place in discussions of his politics, so I’m glad to see Rick take that up. It’s also smart to link it to the Death Wish/Taxi Driver/Bernie Goetz white-vigilante politics of the era.  (Random anecdote: I first saw Taxi Driver at the apartment of Ken Kurson, who was at the U of C around the same time as Rick and I. He now edits the Trump-in-law owned New York Observer.)  On the other hand, Trump’s views on monetary policy are disturbingly sane:

“The best thing we have going for us is that interest rates are so low,” says Trump, comparing the U.S. to a homeowner refinancing their mortgage. “There are lots of good things that could be done that aren’t being done, amazingly.”


The new normal at the Fed. Here’s a useful piece from Tracy Alloway criticizing the idea that central banks will or should return to the pre-2008 status quo.  It’s an easy case to make but she makes it well. This is a funny moment to be teaching monetary policy. Textbooks give a mix of the way things were 40 years ago (reserve requirements, the money multiplier) and the way things were 10 years ago (open market operations, the federal funds rate). And the way things are now? Well…


Me at the Jacobin. The Jacobin put up the transcript of an interview I did with Michel Rozworski a couple months ago, around the debates over potential output and the possibilities for fiscal stimulus. It’s a good interview, I feel good about it. Now, Noah Smith (on twitter) raises the question, when you say “the people running the show”, who exactly are you referring to? It’s a fair question. But I think we can be confident there is a ruling class, and try to understand its intentions and the means through which they are carried out, even if we’re still struggling to describe the exact process through which those intentions are formed.


Me on Bloomberg TV. Joe Weisenthal invited me to come on “What’d You Miss” last week, to talk about that BIS paper on bank capital and shareholder payouts. Here’s a helpful post by Matthew Klein on the same topic. And here is the Fed paper I mention in the interview, on the high levels of bank payouts to shareholders during 2007-2009, when banks faced large and hard to predict  losses from the crisis and, in many cases, were simultaneously being supported in various ways by the Fed and the Treasury.


Links for April 12

Maybe I should aspire to do a links post like this once a week. Today is Tuesday; is Tuesday a good day? Or would it be better to break a post like this into half a dozen short ones, and put them up one at a time?

Anyway, some links and thoughts:


Public debt in the 21st century. Here is a very nice piece by DeLong, arguing that over the next 50 years, rich countries should see a higher level of public expenditure, and a higher level of public debt, and that even much higher debt ratios don’t have any important economic costs. There’s no shortage of people making this general case, but this is one of the better versions I’ve seen.

The point that the “sustainability” of a given deficit depends on the relation between interest rates and growth rates has of course been made plenty of times, by people like Jamie Galbraith and Scott Fullwiler. But there’s another important point in the DeLong piece, which is that technological developments — the prevalence of increasing returns, the importance of information and other non-rival goods, and in general the development of what Marx called the “cooperative form of the labour process” — makes the commodity form  less and less suitable for organizing productive activity. DeLong sees this as an argument for a secular shift toward government as opposed to markets as our central “societal coordinating mechanism” (and he says “Smithian market” rather than commodity form). But fundamentally this is the same argument that Marx makes for the ultimate supercession of capitalism in the penultimate chapter of Capital.


Short-termism at the BIS. Via Enno Schroeder, here’s a speech by Hyun Song Shin of the BIS, on the importance of bank capital. The most interesting thing for my purposes is how he describes the short-termism problem for banks:

Let me now come back to the question as to why banks have been so reluctant to plough back their profits into their own funds. … we may ask whether there are possible tensions between the private interests of some bank stakeholders versus the wider public interest of maintaining a soundly functioning banking system… shareholders may feel they can unlock some value from their shareholding by paying themselves a cash dividend, even at the expense of eroding the bank’s lending base.

As many of the shareholders are asset managers who place great weight on short-term relative performance in competition against their peers, the temptation to raid the bank’s seed corn may become too strong to resist. … These private motives are reasonable and readily understandable, but if the outcome is to erode capital that serves as the bank’s foundation for lending for the real economy, then a gap may open up between the private interests of some bank stakeholders and the broader public interest.

Obviously, this is very similar to the argument I’ve been making for the corporate sector in general. I especially like the focus on asset managers — this is an aspect of the short-termism story that hasn’t gotten enough attention so far. People talk about principal-agent problems here in terms of management as agents and shareholders as principals; but only a trivial fraction of shares are directly controlled by the ultimate owners, so there are plenty of principal-agent problems in the financial sector itself. When asset managers’ performance is evaluated every year or two — not to mention the performance of the individual employees — the effective investment horizon is going to be short, and the discount rate correspondingly high, regardless of the preferences of the ultimate owners.

I also like his diplomatic rejection of a loanable-funds framework as a useful way of thinking about bank lending, and his suggestion that the monetary-policy and supervisory functions of a central bank are not really distinct in practice. (I touched on this idea here.) The obligatory editorializing against negative rates not so much, but I guess it comes with the territory.


Market failure and government failure in the euro crisis. This piece by Peter Bofinger gets at some of the contradictions in mainstream debates around the euro crisis, and in particular in the idea that financial markets can or should “discipline” national governments. My favorite bit is this quote from the German Council of Economic Experts:

Since flows of capital as well as goods and services are market outcomes, we would not implicate the ‘intra-Eurozone capital flows that emerged in the decade before the crisis’ as the ‘real culprits’ …Hence, it is the government failures and the failures in regulation … that should take centre-stage in the Crisis narrative.

Well ok then!


Visualizing the yield curve. This is a very nice visualization of the yield curve for Treasury bonds since 1999. Two key Keynesian points come through clearly: First, that the short-term rate set by policy has quite limited purchase on the longer term market rates. This is especially striking in the 2000s as the 20- and 30-year rates barely budget from 5% even as the short end swings wildly. But second, that if policy rates are held low enough long enough, they can eventually pull down market rates. The key Keynes texts are here and here; I have some thoughts here, developed further here.


Trade myths. Jim Tankersley has a useful rundown in the Washington Post on myths about trade and tariffs. I’m basically on board with it: You don’t have to buy into the idolatry of “free trade” to think that the economic benefits of tariffs for the US today would be minimal, especially compared with the costs they would impose elsewhere. But I wish he had not bought into another myth, that China is “manipulating” its exchange rate. Pegged exchange rates are in general accepted by orthodoxy; for much of modern history they were the norm. And even where exchange rates are not officially pegged or targeted, they are still influenced by all kinds of macroeconomic policy choices. It’s not controversial, for instance, to say that low interest rates in the US tend to reduce the value of the dollar, and thereby boost US net exports. Why isn’t that a form of currency manipulation? (To be fair, people occasionally suggest that it is.) I heard Joe Stiglitz put it well, at an event a year or two ago: There is no such thing as a free-market exchange rate, it’s just a question of whether our central bank sets it, or theirs does. And in any case, the Bank of China’s purchase of dollars has to be considered alongside China’s capital controls, which — given the demand of wealthy Chinese for dollar assets — tend to raise the value of the renminbi. On net, the effect of Chinese government interventions has probably been to keep the renminbi “artificially” high, not low. (As I’ve been saying for years.)


The politics of the minimum wage. Here is a nice piece by Stephanie Luce on the significance of New York’s decision to raise the minimum wage to $15. Also in Jacobin, here’s Ted Fertik on why our horrible governor signed onto this and the arguably even more radical paid family leave bill.

It would be a great project for some journalist — I don’t think it’s been done — to explore how, concretely, this was won — the way the target was decided, what the strategy was, who was mobilized, and how. In mainstream press accounts these kinds of reforms seem to spring fully formed from the desks of executives and legislators, midwifed by some suitably credentialed experts. But when you dig beneath the surface there’s almost always been years of grassroots organizing before something like this bears fruit. The groups that do that work tend to avoid the press, I think for good reasons; but at some point it’s important to share with a wider public how the sausage got made. My impression in this case is that the key organizing work was done by Make the Road, but I’d love to see the story told properly. I haven’t yet read my friend Mark Engler’s new book, This Is an Uprising, but I think it has some good analysis of other similar campaigns.

Links for March 25

Some links, on short-termism, trade, the Fed and other things.

Senators Tammy Baldwin and Jeff Merkley have introduced a bill to limit activist investors’ ability to push for higher payouts. The bill, which is cosponsored by Bernie Sanders and Elizabeth Warren, would strengthen the 13D disclosure requirements for hedge funds and others acquiring large positions in a corporation. This is obviously just one piece of a larger agenda, but it’s good to see the “short-termism’ conversation leading to concrete proposals.

I’m pleased to be listed as one of the supporters of the bill, but I think the strongest endorsement is this furious reaction from a couple of hedge fund dudes. It’s funny how they take it for granted that shareholder democracy is on the same plane as democracy democracy, but my favorite bit is, “Shareholders do not cause bad management, just as voters do not cause bad politicians.” This sounds to me like an admission that shareholders are functionless parasites — if they aren’t responsible for the quality of management, what are we paying them all those dividends for?

I wrote a twitter essay on why the US shouldn’t seek a more favorable trade balance.

Jordan Weissman thinks I was “a bit ungenerous” to Trump.

My Roosevelt Institute colleague Carola Blinder testified recently on reform of the Fed, making the critical point that we need to take monetary policy seriously as a political question. “Contrary to conventional thinking, the rules of central banking are not neutral: Both monetary policy and financial supervision have profound effects on income and wealth inequality … [and] are the product of political contestation and compromise.” Relatedly, Mark Thoma suggests that the Fed “cares more about the interests of the rich and powerful than it does the working class”; his solution, as far as I can tell, is to hope that it doesn’t.

Matt Bruenig has a useful post on employment by age group in the US v the Nordic countries. As he shows, the fraction of people 25-60 working there is much higher than the fraction here (though workers here put in more hours). This has obvious relevance for the arguments of the No We Can’t caucus that there’s no room for more stimulus, because demographics.

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A reminder: “Ricardian equivalence” (debt and tax finance of government spending have identical effects on private behavior) was explicitly denied by David Ricardo, and the “Fisher effect” (persistent changes in inflation lead to equal movements of nominal interest rates, leaving real rates unchanged) was explicitly denied by Irving Fisher. One nice thing about this piece is it looks at how textbooks describe the relationship between the idea and its namesake. Interesting, Mankiw gets Fisher right, while Delong and Olney get him wrong: They falsely attribute to him the orthodox view that nominal interest rates track inflation one for one, when in fact he argued that even persistent changes in inflation are mostly not passed on to nominal rates.

Here is a fascinating review of some recent books on the Cold War conflicts in Angola. One thing the review brings out was how critical the support of Cuba was to South Africa’s defeat there, and how critical that defeat in turn was to the end of apartheid. We tend to take it for granted that history had to turn out as it did, but it’s worth asking if, in the absence of Castro’s commitment to Angola, white rule in South Africa might have ended much later, or not at all.


Links for March 14

A few things elsewhere on the web, relevant to recent conversations here.

1. Michael Reich and his colleagues at the Berkeley Center for Labor Research have a new report out on the impacts of a $15 minimum wage in New York. It does something I wish all studies of the minimum wage and employment would do: It explicitly decomposes the employment impact into labor productivity, price, demand and labor share effects. Besides being useful for policy, this links nicely to the macro discussion of alternative Phillips curves.

2. I like Susan Schroeder’s idea of creating a public credit-rating agency. It’s always interesting how the need to deal with immediate crises and dysfunctions creates pressure to socialize various aspects of the financial system. The most dramatic recent example was back in the fall of 2008, when the Fed began lending directly to anyone who needed to roll over commercial paper; but you can think of lots of examples, including QE itself, which involves the central bank taking over part of banks’ core function of maturity transformation.

3. On the subject of big business’s tendency to socialize itself, I should have linked earlier to Noah Smith’s discussion of “new industrialism” (including my work for the Roosevelt Institute) as the next big thing in economic policy. Eric Ries’ proposal for creating a new, nontransferable form of stock ownership reminded me of this bit from Keynes: “The spectacle of modern investment markets has sometimes moved me towards the conclusion that  the purchase of an investment [should be] permanent and indissoluble, like marriage, except by reason of death or other grave cause… For this would force the investor to direct his mind to the long-term prospects and to those only.”

4. In comments to my recent post on the balance of payments, Ramanan points to a post of his, making the same point, more clearly than I managed to. Also worth reading is the old BIS report he links to, which explicitly distinguishes between autonomous and accommodative financial flows. Kostas Kalaveras also had a very nice post on this topic a while ago, noting that in Europe TARGET2 balances function as a buffer allowing private financial flows and current account balances to move independently from each other.

5. I’m teaching intermediate macroeconomics here at John Jay, as I do most semesters, and I’ve put some new notes I’m using up on the teaching page of this website. It’s probably mostly of interest to people who teach this stuff themselves, but I did want to call attention to the varieties of business cycles handout, which is somewhat relevant to current debates. It’s also an example of how I try to teach macro — focus on causal relationships between observable aggregates, rather than formal models based on equilibrium conditions.

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.


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.


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.)


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.


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.


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.


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?

On Other Blogs, Other Wonders

Links for Friday, September 11:


From my Roosevelt Institute colleagues Mike Konczal and Nell Abernathy, here’s a primer on “financialization“. This term is used widely but not always precisely; most definitions are some tautological variant of “more finance.” Mike and Nell wisely don’t try to provide a single analytical definition, but treat it as shorthand for a number of linked but distinct developments. Especially useful if, like me, you’re always looking for good material on finance and macroeconomics to use with undergraduates.


Also from Mike Konczal: NY Fed Study Should Redefine How We Think About Student Loans and College Costs. There are two interesting points here, from my point of view. First, the fact that loans have a much stronger effect on college costs than Pell grants do, is yet another piece of evidence for the importance of liquidity; in a world without credit constraints, only the subsidy associated with federal student loan programs would affect anyone’s behavior. Second, it develops an argument I’ve been making for years — an important advantage of direct provision of public goods over vouchers and subsidies is that price movement will amplify effect of the former and reduce the effect of the latter.I should add that at CUNY, where I teach, the great majority of the  students take on no debt at all, since Pell grants and New York’s Tuition Assistance Program both cover the full cost of tuition and fees.


Over at Jacobin, my John Jay colleague Ian Seda-Irizarry has a useful overview of the Puerto Rican debt crisis.


Related to the disgorge the cash and capital-reallocation topics we’ve been discussing here, Evan Soltas has an interesting post on What Ails the American Startup? He looks at census data that includes  all firms, not just the publicly-traded corporations I’ve focused on, and finds the same long-term decline in the share of the economy accounted for by newer firms.



My friend Will Boisvert, whose two posts on nuclear power remain the most widely-read things to ever appear on this blog, is now writing for the Breakthrough Institute. I’m not entirely down with the “ecomodernism” project, but Will is a very smart and careful writer and his stuff there is very worth reading.


Here is my brother on CNBC, talking about the Kim Davis case.