1. Conservatives tend to believe in market efficiency. They also believe that high inflation is just around the corner, because of the Fed’s “easy money” policy. But the TIPS markets don’t seem to agree. Conservatives often respond by pointing to the sharp rise in gold prices during recent years. Unfortunately, the increase in demand for gold is occurring in all the wrong places. Here’s a WSJ article on the skyrocketing demand for gold in Thailand:
There is a longer-term trend toward gold across the rest of Asia, too. The region now makes up around 58% of the global market for gold, according to statistics gathered by the World Gold Council, compared with 35% in 1970, while the combined demand from Europe and North America has fallen from 47% to 27% in the same period.
2. Tyler Cowen recently had this to say, in response to a commenter who argued that interest and dividends should receive the same tax treatment:
Contrary to common impression, the tax deductibility of interest payments does not give a tax advantage to borrowing, not if the return to savings is taxed.
That’s right, but of course it implies that dividends should also be tax deductible. And if they aren’t, there’s a good argument for making neither interest nor dividends deductible, but then lowering the corporate tax rate to make the reform revenue neutral. It seems odd that we are explicitly favoring debt over equity. What public policy goal does that advance?
3. Tyler Cowen wrote a New York Times column that commented on the large amounts of excess reserves in the banking system:
THE Fed’s stockpiled liquid reserves have met some heavy criticism. Hard-money advocates contend that they are a prelude to hyperinflation — although market forecasts and bond yields don’t bear this out — while proponents of monetary expansion have wished that banks would more actively lend out those reserves to stimulate the economy. That second view assumes that the financial crisis is essentially over, but maybe it’s not. As the euro zone crisis continues, it seems that Ben S. Bernanke has been a smarter central banker than we had realized.
I don’t know if the “proponents of monetary expansion” refers to market monetarists, but I’d be horrified if more than 10% of the excess reserves were to suddenly leave the banking system, as it could lead to excessive growth in NGDP and prices. I also have no desire to see banks “lend out” the reserves; I’d be happy to see them sell off a tiny percentage of their excess reserves. The last thing we should be encouraging right now is more bank lending. The issue of the optimal level of excess reserves is separate from the issue of where to set the IOR right now. We could get 6% NGDP growth next year with ERs of $200 billion or $2 trillion, it all depends on where the IOR is set, and hence what happens to the demand for ERs. Don’t confuse demand with quantity demanded. Tyler probably understands that distinction, but I’m sure many NYT readers do not.
4. For what it’s worth I think Krugman, Williamson, Noahopinion, DeLong, Andolfatto, and Lucas are all wrong. Lucas’s basic macro model treats changes in M and V as being equivalent. Sudden M*V shocks cause business cycles. That’s my view too. So although he said he was holding M constant, his comments make sense only if you hold M*V constant. In which case he expressed his reservation about fiscal stimulus in an exceedingly inept fashion, as that policy is based on the notion that government spending will boost M*V (perhaps by boosting V).
David Romer recently pointed out that the fiscal multiplier was roughly zero during the Great Moderation:
As Robert Solow stresses in his remarks in this session, we should not be trying to find “the” multiplier: the effects of fiscal policy are highly regime dependent. One critical issue is the monetary regime. Consider estimating the effects of fiscal policy over the period from, say, 1985 to 2005. Central banks were actively trying to offset other forces affecting the economy, and they had the tools to do so. Thus if they were successful, one would expect the estimated effects of fiscal policy to be close to zero.
My hunch is that Lucas understood this intuitively (multipliers had faded from view in recent decades) but at the moment he criticized Christina Romer he forgot why, as he hadn’t even thought about the issue for many years. That’s basically what DeLong said, except I have a different view of the model Lucas would defend if he had thought about it. I think it would have been my model of the near-zero multiplier.
5. Lots of people worry about persistent US current account deficits. But what if these deficits do not exist? If we are running current account deficits, then you’d expect the net outflow of investment income to be rising faster (indeed much faster) than the net inflow. Instead, Paul Krugman shows that the two series are quite closely correlated during normal times, and the US inflow lead has actually widened during the recent recession (when rates on our T-securities plunged.)
The US has a big saving problem. We save too little (due to multiple distortions in our tax and benefit systems.) But we don’t have a current account problem. “Unsustainable imbalances” can be sustained forever. Those who bet the other way will be disappointed.
Happy New Year!