Matt Yglesias:

My view is that the biggest relevance of Southern Europe to the United States is the current high social prestige enjoyed by the twin ideas that the social responsibility of a corporation is to be profitable and that the primary moral and legal obligation of a corporate manager is to enrich shareholders. These ideas combine to create a toxic moral climate that is undermining the social context in which a successful market economy can flourish.

In a healthy society, a business leader might invest time and resources in rent-seeking but he wouldn’t brag about doing so and certainly he might choose to take the honorable path and not do it. But the current paradigm in the implicit US political philosophy is that he has a moral obligation to divert resources away from R&D and toward lobbying if the ROI on lobbying is higher. It says he has a moral obligation to find ways to trick customers into overpaying if he can find them. It says he has a moral obligation to violate regulations if the Net Present Value of paying the fines when you are caught exceeds the cost of compliance.

In other words, it replicates Banfield’s amoral familism but with shareholders replacing the nuclear family as the local of ethical thinking.

This is all further exacerbated by the ideas of Public Choice Economics which tend to move from (correctly) asserting that government institutions’ performance is often undermined to some extent by the self-interest of government officials to a kind of perverse fatalism which suggests that wholly selfish and inept behavior is all that is possible from public institutions.

I once talked to an investment banker from northern Europe who was surprised at how much money American banks spent on lobbying.  His bank did didn’t even have a lobbying department.  I suppose you can think about that in one of two ways. Banking regulation in his country was probably far less complex than in the US, and so there was less need for lobbyists. Or perhaps the culture was less corrupt than in America—which is itself a less corrupt than average culture, by global standards (at least if you believe survey data, and/or ratings like Transparency international.) So which is it?

My hunch is that it’s both.  More importantly, I think the two interact.  Bad culture producing bad governance, and bad governance produces bad culture.  And by “bad governance” I mean complex regulations, which push firms away from wealth creation and towards rent seeking.  I’ve talking talked to more than one businessman who straight out told me that his business was regulatory arbitrage in the financial sector.  They made money by talking taking advantage of poorly designed regulations. Over time, that surely must have a negative effect on culture. Lobbyists would try to get even more government regulation, to open up more rent-seeking opportunities.

Off topic, also over at Vox.com there is an article on whether you should drive with one foot or two feet.  Over at Econlog I have a new post that mentions my daughter getting a learners permit.  The Vox article suggests that driving with two feet is safer, if you drive an automatic transmission car.  That’s actually the way I’ve always driven, and it feels safer to me.  But I was told that mine was the wrong way, and hence I was planning on teaching my daughter the “right way.” Now I don’t know what to do.  Any thoughts?  Keep in mind that’s it’s extremely unlikely that my daughter would every drive a manual transmission car.  Like 1000 to 1 against, even if she learned to drive the standard way.  (My Italian readers are requested not to reply to this question; I already know what you are going to say.)

PS.  When they ask how much you’ve given to charity, how come they never ask about the auto insurance we are forced to buy?  I’ve contributed maybe $20,000, and (knock on wood) never pulled out a cent (except when a branch fell on my car.)  I’m subsidizing the horrible Boston drivers—why isn’t that charity?

HT:  TravisV

The past week it’s been open season on Germany.  Even I have occasionally bashed them for their views on monetary policy.  In a way this is odd, because in many respects Germany has been (since 1945) almost like a model country.  Other countries should try to be more like Germany.  It’s also odd because Germany’s views are completely typical of the eurozone–so why single out that one country?  Yes, France and Italy are a bit more moderate, but the other 15 are just as upset with Greece as is Germany.

Ben Bernanke recently made some comments on Germany and the eurozone:

Since the global financial crisis, economic outcomes in the euro zone have been deeply disappointing. The failure of European economic policy has two, closely related, aspects: (1) the weak performance of the euro zone as a whole; and (2) the highly asymmetric outcomes among countries within the euro zone. The poor overall performance is illustrated by Figure 1 below, which shows the euro area unemployment rate since 2007, with the U.S. unemployment rate shown for comparison. . . .

In late 2009 and early 2010 unemployment rates in Europe and the United States were roughly equal, at about 10 percent of the labor force. Today the unemployment rate in the United States is 5.3 percent, while the unemployment rate in the euro zone is more than 11 percent. . . .

The slow recovery from the crisis of the euro zone as a whole is the result, among other factors, of (1) political resistance that delayed by many years the implementation of sufficiently aggressive monetary policies by the European Central Bank; (2) excessively tight fiscal policies, especially in countries like Germany that have some amount of “fiscal space” and thus no immediate need to tighten their belts; and (3) delays in taking the necessary steps, analogous to the banking “stress tests” in the United States in the spring of 2009, to restore confidence in the banking system.

So far this is very similar to my views, except the part about fiscal policy.  But here’s where Bernanke loses me:

What about the strength of the German economy (and a few others) relative to the rest of the euro zone, as illustrated by Figure 2? As I discussed in an earlier post, Germany has benefited from having a currency, the euro, with an international value that is significantly weaker than a hypothetical German-only currency would be. Germany’s membership in the euro area has thus proved a major boost to German exports, relative to what they would be with an independent currency.

I see this argument a lot, but it makes no sense on either theoretical or empirical grounds.  Over at Econlog I have a post showing that northern European countries not in the euro have just as big current account surpluses as Germany.  And by the way, even on theoretical grounds joining the euro should not matter at all, if Europe had previously had a fixed exchange rate system.  So I’ll give Bernanke the benefit of the doubt and assume that it’s the fixed exchange rate regime that he thinks actually benefits Germany, not the euro itself.  Let’s also put aside the question of why Bernanke thinks a current account surplus “benefits” a country—that’s not standard economics.  Indeed by that logic Australia would be suffering from its large chronic CA deficits.  The CA surplus is simply domestic saving minus domestic investment; it’s not clear why we should care about it.

There is one way to test Bernanke’s claim.  A country with an undervalued currency will see its real exchange rate appreciate through inflation.  Recall that in the long run monetary policy only affects the nominal exchange rate, the real exchange rate is determined by the fundamentals driving saving and investment.

The counterargument is that prices are sticky, and hence it may take a while for the real exchange rate to reach equilibrium.  Yes, but even so, if this were occurring then you’d see high inflation in Germany during the adjustment process.  Here’s the actual inflation rate in Germany:

It seems to me that Bernanke’s claim might apply to the early 1990s.  At that time Germany was booming, partly due to the rebuilding involved with re-unification, and the ERM tied Germany to weaker economies like Britain and Sweden.  At that time, the DM was undervalued, and instead of a rise in the nominal exchange rate (prevented by the ERM), inflation rose sharply higher, raising the real exchange rate.

Today German inflation is merely 0.3%, not what you’d expect if the euro were undervalued in Germany.  Indeed I see little evidence of an undervalued currency in Germany since 1995.  Let’s review:

1.  Bernanke’s claim is not consistent with mainstream macro theory, at least in the long run.

2.  Bernanke’s claim is not consistent with the fact that other northern European countries that still have their own currencies also have huge CA surpluses.  Why wouldn’t a Germany with the DM be like Sweden and Switzerland? (I leave out Norway, whose CA surplus may be bolstered by oil.)

3.  And Bernanke’s claim is not consistent with the very low and falling inflation rate in Germany.  If the euro were undervalued in Germany, inflation would be high and rising.

I’ve been telling people that 1984 is coming, but no one seems to care.  Here’s one more indication:

Samsung SmartTV

The Samsung SmartTV has a built-in microphone that is equipped with voice recognition technology that allows users to give verbal commands to the TV. In order for Samsung to convert your speech to text, the voice commands are sent over the Internet to a third-party for interpretation.

However, since the TV is “always on,” the microphone is recording every word you’re saying at all times. Even in its SmartTV privacy policy, Samsung acknowledges that all spoken words, including personal or other sensitive information, are sent unencrypted to the third party.

Eh, what could go wrong?  It’s not like high tech firms would give in to government pressure to invade the privacy of tech users.  No need to fear the NSA ever getting any of that info.

I’ve argued that it’s up to the younger generation to figure out how much privacy they want.  My only request is that we stop having students read 1984 in high school.  If that’s the world we want, then let’s stop pretending it’s some sort of dystopia.

Fortunately we don’t have a war that seems to go on forever, and that the government uses as an excuse to have all sorts of extra powers.

Update:  Et tu, Ford?

The Neo-Fisherian debate continues, and continues to miss the point.  The debate is framed in terms of whether a higher interest rate causes higher inflation.  But that’s not even a question.  Or at least it’s meaningless unless you explain whether the higher interest rate is produced by an expansionary monetary policy or a contractionary monetary policy. Central banks have the tools to do it either way.  On the other hand I am increasingly getting the impression that the New Keynesian model is incapable of handling that distinction.  Here’s John Cochrane responding to a recent Woodford talk on the issue:

This is a particularly important voice, as it seemed to me that standard New-Keynesian models produce the new-Fisherian result. i = r + Epi is a steady state in all models. In old-Keynesian models, it was an unstable steady state, so an interest rate peg leads to explosive inflation or deflation. But in new-Keynesian models, an interest rate peg is the stable/indeterminate case. There are too many equilibria, but if you raise interest rates, inflation always ends up rising to meet the higher interest rate.

What I can glean from the slides is that Garcia Schmidt and Woodford agree: Yes, this is what happens in rational expectations or perfect foresight versions of the new-Keynesian model. But if you add learning mechanisms, it goes away.

My first reaction is relief — if Woodford says it is a prediction of the standard perfect foresight / rational expectations version, that means I didn’t screw up somewhere. And if one has to resort to learning and non-rational expectations to get rid of a result, the battle is half won.

But that’s only preliminary relief. Schmidt and Woodford promise a paper soon, which will undoubtedly be well crafted and challenging.

If that’s true, then the NK model is obviously very, very flawed.  Noah Smith seems to agree that rational expectations is the key assumption:

The question of whether interest rates affect inflation in a Woodfordian way or a Neo-Fisherian way depends on whether people’s expectations are infinitely rational. Woodford’s new idea – which will certainly be a working paper soon – is that people don’t adjust their expectations to infinite order. He essentially puts bounded rationality into macro. He posits a rule by which expectations converge to rational expectations.

I have one small quibble here.  When Smith writes:

The question of whether interest rates affect inflation in a Woodfordian way or a Neo-Fisherian way depends on whether people’s expectations are infinitely rational.

He seems to imply that he is discussing the real world.  Like it would actually matter whether people had ratex. My hunch is that you can easily get either result with or without ratex, if you don’t restrict yourself to the NK model.  The liquidity effect from easy money should be able to be derived with simple sticky prices, even with ratex.  I’d rather Smith had said:

The question of whether interest rates affect inflation in a Woodfordian way or a Neo-Fisherian way in the NK model depends on whether people’s expectations are infinitely rational.

BTW, in this post I showed how you could get a Neo-Fisherian result.  That doesn’t mean I think they are “right”, just the opposite.  But I am increasingly confident that they have stumbled on something important, a serious flaw in the NK model. I’d rather people continue to assume rational expectations, and fix the model in some other way—like defining monetary policy in terms of something other than interest rates.  Stop assuming that “the central bank raises interest rates” is a meaningful statement.  It isn’t.

PS.  I wrote this a couple days ago but wasn’t sure if I was missing something, so I didn’t post until today.  Nick Rowe’s new post convinced me that I’m not missing something obvious.

HT:  Tyler Cowen

Stephen Williamson has a very good post on the Canadian austerity of the 1990s. But in the comment section I think he misunderstands the concept of “fiscal offset.” First an anonymous commenter says:

Canada has offset the contractionary effects of austerity via monetary policy…

And Williamson responds:

That’s part of the point. It doesn’t look like they did. As you say, Canada has an independent monetary policy, but, post-1991 they appear to be behaving as by-the-book inflation targeters. Basically, they make an agreement with the fiscal authority about their policy rule, and then they stick to it, independent of what the fiscal authority is up to.

Sticking to your target regardless of what the fiscal authority does is exactly what fiscal offset means.  The idea is simple. A fiscal contraction would normally depress AD, causing inflation to slow.  The central bank must do enough stimulus to offset that potential decline in AD, in order to prevent inflation from falling.  If you observe the inflation rate always being on target, then the central bank is successfully offsetting any fiscal action that would have otherwise moved AD and inflation.  As an analogy, if the temperature in your house is always 22 degrees (centigrade), then the thermostat/furnace is doing an excellent job of offsetting the warm and cold fronts that move through your town.

So why do I call the post “excellent”? Start with the fact that Williamson recognizes that fiscal austerity in Canada was not contractionary.  Even better he recognizes something that all too few bloggers understand:

But it might be more appropriate to think about monetary policy in terms of the ultimate goals of the central bank.

Bingo.

PS.  Yes, fiscal policy has other channels besides AD, so real GDP could still change. But the AD channel is what Keynesians obsess over.

HT:  Tom Brown