Erdmann and Yellen will like this story

Janet Yellen has argued that the long term unemployed are not permanently out of the labor force, and that with faster growth in aggregate demand we can re-absorb many of those people.  Kevin Erdmann has done a number of thoughtful posts arguing that the extended unemployment benefits, which ended at the beginning of this year, raised the jobless rate somewhat.

This story caught my eye:

It’s been a rough year for the long-term jobless, with Congress refusing to renew an extension of federal unemployment benefits and some states slashing already-meager safety net programs, but a new study by a pair of Federal Reserve Board economists offers some hope for the future.

In a paper issued this week, Tomaz Cajner and David Ratner find that the percentage of the unemployed who have been jobless for more than 27 weeks – the definition of “long-term” unemployment – has been dropping sharply in recent months, and that there is strong evidence to suggest that it is because they are finding jobs rather than simply dropping out of the labor force altogether.

The news is good for the jobless, and it’s also good for Cajner and Ratner’s boss, Federal Reserve Board Chair Janet Yellen, who has staked out a public position claiming that as the economy continues to recover, the long-term jobless and even those who have left the workforce in discouragement, would begin to find work again.

Yellen’s position is in stark opposition to a competing theory backed by prominent Princeton University economist Alan Krueger and others, which holds that the long-term jobless are highly marginalized. In Krueger’s analysis, the long-term jobless have been so alienated from the workforce, for example, that even their presence in large numbers is not enough to drive down wages.

Further support for Yellen’s theory appeared yesterday in the National Association for Business Economics Business Conditions survey. NABE found that fewer companies are having trouble attracting skilled workers today than did this time last year – a counterintuitive finding, given that the economy has added 1.2 million jobs in the last 12 months and skilled workers were, presumably, among the most attractive candidates for hire. A possible explanation is that, as per Yellen’s prediction, discouraged workers are rejoining the labor force. 

In their paper, Cajner and Ratner point out that in terms of creating the large number of long-term jobless, the Great Recession was much worse than previous economic downturns. It peaked at 45 percent of the jobless, whereas in the 1982 recession, it topped out at 26 percent.

But the government did not offer 99-week unemployment benefits during previous recessions.

“In many ways the fight against unemployment during the recent recovery has been mainly one of bringing down the long-term unemployment rate,” they write. And finally, that’s starting to happen.

“Since December 2013,” according to Cajner and Ratner, “the long-term unemployment rate dropped 0.5 percentage point, thereby accounting for almost the entire decline in the aggregate unemployment rate.

Oddly, the media discusses Yellen’s explanation but not Erdmann’s.  Or maybe it isn’t odd, maybe it’s normal.

Off topic:  Back in 2009 we were told that there had been a housing “bubble.”  That there was all sorts of wasteful malinvestment.  We now know that there was much less malinvestment than people assumed, and I doubt bubbles even exist.

First cities like New York and San Francisco came back.  Then much of the East and West Coasts. Then Texas.  And now Miami is red hot.  Those empty condos were absorbed several years ago, and they can’t build new ones fast enough.  Imagine how strong the US housing market would be right now if the government hadn’t cracked down on immigration in 2006, and then drove NGDP down sharply in 2008-09

The conventional wisdom will eventually need an alternative explanation for the Great Recession. How about tight money?

On another issue, Harold Pollack tweets:

Halbig straightforward case of conservative judicial activism. It’ll be curious see whether any commentators who opposed ACA acknowledge it.

I do.  I opposed Obamacare, and also think that when the law is ambiguous the courts should go with clear Congressional intent.

BTW, Kevin Erdmann has an excellent 11 part series that explains why low interest rates lead to less leverage, not more.  It also touches on lots of other interesting topics.  Here’s one example from part 10:

This relates to another topic where I would reverse the standard narrative – international capital flows and wage levels.  It frustrates me to see economists universally referring to the movement of production to low wage economies, when the opposite is true.  Sometimes when the earth revolves around the sun, it looks like the sun is circling the earth.  And, here, we have uncontroversial data that capital flows overwhelmingly to high wage economies.  In cases where capital flows change noticeably, it is usually where institutional improvements in a developing economy lead to an expansion in the productive basket of goods they can supply, and so capital flows there to accommodate the new production.  Because wages are generally low at an absolute level, it appears that production is moving to exploit low wages, but this is absolutely wrong.  The trigger for expanded production is also a trigger for higher wages. Production doesn’t move to where wages are low – it moves to where wages are rising.  This subtle distinction is so fundamental and so important to a proper understanding of international economics, and yet so universally misstated.

I’m still working my way through the series.

Better homeless than in a lunatic asylum

A few weeks ago Paul Krugman suggested market monetarists were homeless.  By that he means we don’t have much support among GOP Congressman.  He doesn’t say why we’d want to have their support, after all, they don’t make monetary policy.

I pointed this out in a post a couple weeks ago, in reply to the Krugman post.  Now Krugman has posted again, repeating the claim that we are “homeless” because the House GOP doesn’t like us. Of course there is no sign he read my reply.  The only surprise is that lots of commenters think I need to reply again.  But why?  I already replied to his argument even before he wrote the latest post.

Still, I suppose one can always find something to comment on, so let’s consider this:

But there’s also a big difference in the intellectual roles of MM on the right and Keynes on the left.

Talk with Barack Obama, and you’ll find that he has a basically Keynesian view of the world. It may have wobbled a bit in the past, at times when he seemed to buy into the Confidence Fairy, but it’s still his basic outlook — and his aides are very much IS-LM macro types. True, they haven’t gone all out to push for fiscal expansion in the face of opposition (but remember the payroll tax cut), but that’s mainly a political judgement on their part. It’s not a fundamental difference in worldview from friendly economists.

Contrast this with Republican leaders, who get their macroeconomics from Hayek and Ayn Rand, and are clearly liquidationist; it’s not that they don’t take advice from MM, they’re actively hostile to its very concepts.

That’s what I mean when I say that MM is homeless, in a way that my tribe isn’t.

Most politicians are morons when it comes to economics.  That’s nothing to be ashamed of; I’m a complete moron about most non-economics fields in science and the humanities.  Would you care about my views on particle physics or French poetry? What I don’t see is why someone would be proud that certain politicians seem to like their economic theories.  I never get a chance to “talk with Barack Obama,” but I very much doubt he is a “Keynesian.”

1.  Obama thought the high unemployment of 2008 was due to ATM machines taking jobs from bank tellers.  Maybe he’s a Luddite.

2.  Obama thought a low interest rate policy was dangerous, because it could lead to asset bubbles.  Maybe he’s an Austrian.  Or maybe he listens to Larry Summers.

3.  Obama would often leave Fed seats empty for long periods, believing the Fed could do nothing when rates had fallen to zero.  When he finally did appoint people to the Fed, they were not people who agreed with Krugman on monetary policy.  At one point 6 of the 7 members of the board were Obama appointees, and not a single one agreed with Krugman on monetary policy.  Obama didn’t even bother making any appointments in 2009, when they would have been really helpful, and when he had a filibuster-proof majority in the Senate.  Maybe Obama only reads Krugman on the days where Krugman says monetary policy is ineffective at the zero bound, not the days when he says monetary stimulus is highly desirable at the zero bound.

4.  Obama thinks so little of monetary policy he is supposedly looking for someone with “community banking experience” for the Board.  I’m sure all the community banking experts out there are up to date on Woodford’s latest models of how to do policy at the zero bound.  Maybe Obama is a follower of Elizabeth Warren, the senator who said super inflation hawk Paul Volcker would be a great choice to head the Fed. (After all the Fed is all about regulation, not monetary policy, isn’t it?)

Oh, and that payroll tax cut that Krugman mentions, it was a GOP idea, Obama had to be convinced:

The White House is counting the 2 percent payroll tax cut among its “wins” in the tax deal worked out with congressional Republicans. But it’s a win based on a Republican idea and one that many congressional Republicans support.

You may recall that a payroll tax break or “holiday” was a Republican proposal back in 2009. Conservatives liked the idea then in lieu of a tax credit.

.  .  .

In 2009, the White House rebuffed the idea, preferring its grab bag of stimulus spending programs.

Of course the employee-side payroll tax cut did not speed up the recovery in 2011, nor did the repeal in 2013 slow it down, as Keynesians like Krugman predicted.  They should have done the employer-side payroll tax cut that Christy Romer suggested, which would have cut labor costs and boosted employment.

And followers of the IS-LM model?  Those would be the folks who thought money couldn’t have been tight in the early 1930s (or 2008), because interest rates were low.  Or the people who thought the US economy would slow down in 2013 due to savage austerity.  Or the people who thought monetary stimulus in Japan was pointless, they were at the zero bound.  Or the people who said the Swiss National Bank would not be able to stop the franc from appreciating.  Or the people who blamed the eurozone double dip recession on fiscal austerity, even though the US did slightly more austerity.  Or the people who said British fiscal policy really, really, really was quite contractionary, until growth picked up suddenly and they realized it could not have been contractionary.

PS.  And now Congress wants to pass a law requiring the Board of Governors to have at least one expert on community banking.  You can’t make this stuff up.

America the bully

Recently I’ve traveled to places like Switzerland and Britain.  One thing I noticed is that American policy is perceived quite differently overseas than in America.  At home, I don’t recall much discussion of “Fatca,” a regulation that forces foreign banks to provide the US Treasury with all sorts of data on American citizens.  This is also tied in with other somewhat unrelated issues; US spying on Germany, the Snowdon revelations, the $9 billion fine imposed on a French bank, etc. BTW, here’s a sensible essay that criticizes both sides of the French bank dispute:

There are no meaningful checks on this process, let alone a plausible procedure for BNP to appeal. Bank bosses cannot even publicly criticise deals they agree to under extreme duress. No precedent is set and no guidance provided as to the limits of the law and the proportionality of the punishment. So even if BNP fully deserves its punishment, the legal system that meted it out is closer to an extortion racket than justice. France’s economy minister, Arnaud Montebourg, has compared America’s pursuit of BNP to “economic warfare”. In other words, a bank that catered to mass murderers has had some success in portraying itself as a victim. Any process that can make BNP’s dealings with Sudan look anything less than shameful must be very flawed indeed.

BTW, London is really booming right now.  The locals believe this is partly due to its legal system, which is not corrupt (like most countries) or completely insane (like the US.) I’m no expert here, so I can’t comment on the merits of Fatca, but here’s what I do know:

1.  I can tell when outrage is real as opposed to mere self-interest at work.  There is real outrage overseas.  It may not be justified, but it is sincere.  It isn’t just anger about tax shelters being closed down.  There is a perception that the US is trying to make its laws apply everywhere in the world, not just in the US.  That the US is a bully in the financial world in the same sort of way that Russia is a bully in foreign policy

2.  There are complaints that the US forces foreign banks to divulge all sorts of information on US depositors, but refuses to reciprocate.  If Latin American governments ask for information on the Miami bank accounts of their residents (who may be evading taxes) the US government refuses to provide this information.  I don’t know if this double standard exists, but it is certainly perceived to exist.

3.  The US is the only major country that applies taxes on a citizenship basis, not a territorial basis.

4.  There has been a dramatic increase in the percentage of Americans living overseas who renounce US citizenship.  Some claim the paperwork requirements are too burdensome.  On the other hand the absolute number renouncing citizenship is still fairly small (4000/year out of a overseas population of 7 million), so I don’t know how worrisome this is.

5.  Some stories claim the cost of complying with Fatca regulations is actually far more than the expected $800 million in extra tax revenue.  Again, I don’t know if this is true.

6.  Nor is it clear that the law will impact its intended targets:

Meanwhile, the drug dealers and sophisticated tax evaders who inspired all this will switch into non-financial assets, such as art and property, or hide behind shell companies and trusts. The latter would be easier to penetrate if reliable ownership information were collected, but often it is not—and America is one of the worst laggards (see Delaware, Nevada and all the other money-laundering paradises within its borders).

7.  Boris Johnson, who might well be a future Prime Minister, was (possibly?) told that he is no longer welcome to be a customer of National Savings and Investment, a major British investment company.  His crime?  He is tainted by having been born in New York.  Even though he is British, and earns money being mayor of London, the fact that he is born in New York makes him a US citizen and hence a possible target of the US government.  That’s an extreme case, but it shows the lengths to which the Treasury is willing to go.

8.  There’s also a perception that the US government is trying to go after industries it doesn’t like, by pressuring banks to stop serving them:

The congressional report’s contention is that banks, worried about appearing to turn a blind eye to possible fraud, are simply ceasing to do business with all firms in industries that regulators have identified as suffering from frequent legal problems. These include seemingly legitimate businesses such as selling ammunition, coins, medicine, magazine subscriptions, fireworks and tobacco, the report points out. As it goes on to say, “Banks are put in an unenviable position: discontinue long-standing, profitable relationships with fully licensed and legal businesses, or face a potentially ruinous lawsuit by the Department of Justice.”

Banks have nothing to fear from the Obama administration as long as they obey “the law?”  Don’t make me laugh.

I’d be interested in what others think about this issue, especially commenters who have an overseas perspective.  Banks are very unpopular right now, and are an easy target.  But it also looks like lots of regular people are being hit in the crossfire.  Isn’t it always that way?

A utilitarian defense of reckless young men

Throughout history, young men have tended to be more reckless than other people.  There may be some sort of Darwinian mechanism involved here, as tribes might survive better if young men engaged in lots of high risk/high reward behavior, with warfare being an obvious example.

On the other hand it’s generally assumed that Darwinian factors don’t provide a solid foundation for modern morality, and that we can use our reasoning skills to develop better ethical systems, such as religion or natural rights or utilitarianism.  I’d like to make the counterintuitive argument that utilitarian reasoning suggests that we might want to thank our young men for behaving so recklessly.

That’s not to say all sorts of reckless behavior can be justified by utilitarian arguments.  I happen to think that warfare is unjustified in the modern world (although perhaps justified in a Malthusian world.)  But what about other types of reckless behavior, such as climbing Mt. Everest?  Consider this interesting observation:

It’s now well known that in mediaeval Western Europe women married later than in other parts of the world, and fewer women got married in the first place. This had the effect of reducing fertility rates well below the biological maximum. In East Asia, the female marital age was much lower, but a combination of infanticide, birth-spacing and other factors apparently kept net fertility only a little higher than Western Europe’s. Thus, under Malthusian assumptions, East Asia’s relative poverty is largely to be explained by its lower mortality: life in Western Europe was simply more lethal but richer, whilst more East Asian adults survived and lived longer but more miserably.

Let’s suppose the goal is to maximize the total number of “utils” of happiness.  But let’s also put aside questions of total population, (which I find almost impossible to even think about, and I’ve never see anyone else discuss in a persuasive fashion.)  So we’ll assume that the Earth’s population levels off at some point, say 10 billion people.  A steady state is reached.  Which is better, an average lifespan of 80 or 100?

At first glance it seems like 100 is obviously better, especially if people are just as healthy on average.  But it’s not at all clear that 100 is better that 80.  Yes, an average of 100 years of life is better for each living person, but 25% more people get a shot at life if the average life expectancy is only 80 in a steady-state society.  Here is where our distorted views of “personal identity” (which I regard as a fiction) distort our reasoning process. We all tend to think our own life is more important than the lives of others, often far more important. Would you give away 90% of your retirement savings to save one life in a poor country?  But objectively speaking, if we all think we are especially important, then we are all deluded, at least from a global welfare perspective.  This post is about what’s best for society—not YOU.

We are among the lucky to be alive, so naturally we favor polices that boost lifespans to 100 and insure fewer people get a chance to live. But what would actually maximize global aggregate happiness in a society of 10 billion people?  Clearly since humans can be replicated at almost zero cost (easy for a man to say!) then we’d want to maximize the number of utils earned per hour.  And if there is a trade-off between exciting/fun lives and long lives, we’d want to move in the direction of exciting/fun lives, even if it reduces average lifespans. Reckless young men who climb Mt. Everest then produce positive externalities for society.  (The ancients understood this externality concept, which is why they honored warriors.)  A good example in the modern world is football players who achieve great things while young, but at the cost of a shorter lifespan.  Ditto for teenagers who hot-rod around at high speeds.  And surprisingly, that’s even true if they kill innocent people.  Those innocent people can also be replaced.

[I'm tempted to include drug and alcohol use, but I don't know whether those activities actually make people happier.  Cigarette smoking is a better fit, although even here you need to consider whether smokers on average suffer more at the end of life.  My father certainly suffered a lot.]

Am I serious or is this all just a big spoof?  I’m not quite sure.  (Let’s just say I don’t want this post to be quoted.)  Even though my “everyday views” of morality are conventionally boring (I’m outraged by reckless drivers), when I start thinking about fundamental principles of morality my views become radically agnostic.  I don’t know what to think, other than that I suspect most of our shared views of morality are nothing more than another example of cognitive illusions–no different from the belief that low interest rates mean easy money.

PS.  Like many men, I took some really big risks when I was young. I’m lucky to be alive. Sometimes I think to myself “how could I have been so foolish.”  But when I dig deeper, try to remember how I felt at the time, try to be sympathetic to the views of that “other person,” then I’m not so sure. Something was pushing me to take those risks–how can I be certain it was a mistake?

PPS.  Just started reading Knausgaard’s 3rd volume.  I was immediately reminded of how fascinated I was as a boy by holes in the ground.  Knausgaard seems to agree with me that the younger version of a person is not the same person at a younger age, but rather a different person.

PPPS.  Perhaps the counterargument is that I’ve ignored the cost of an early death on the utility of the young man’s surviving family and friends.

PPPPS. Over at Econlog I have a more serious defense of utilitarianism.

 

IS/LM and AD

Commenter Joseph sent me an excellent set of PP slides by a professor at Harvard named Chris Foote.  He has a very clear derivation of the AD curve from the IS-LM model.  This slide caught my attention.

Screen Shot 2014-07-16 at 3.32.54 PM

 

The “spending hypothesis” obviously cannot explain the Great Depression.  In 1987 we saw an equally big stock market crash, and GDP kept booming.  (And don’t bother trying to concoct excuses about how things were different in 1987—I’ve swatted them all down 100 times.)

An investment backlash? Does that mean people switch from investment goods to consumer goods? If so, why did consumption also fall?  

Hoover actually favored public works projects, so fiscal policy explains nothing until at least 1932, when he raised taxes.   Was there a Great Depression in 2013?  I don’t think so.  And yet we had “savage” austerity in 2013.

OK, so it was tight money.  We’ve known that for 50 years, ever since Friedman and Schwartz. What interests me is the suggestion that the “money hypothesis” is contradicted by various stylized facts. Interest rates fell.  The real quantity of money rose.  In fact, these two stylized facts are exactly what you’d expect from tight money.  The fact that they seem to contradict the tight money hypothesis does not reflect poorly on the tight money hypothesis, but rather the IS-LM model that says tight money leads to a smaller level of real cash balances and a higher level of interest rates.

To see the absurdity of IS-LM, just consider a monetary policy shock that no one could question—hyperinflation.  Wheelbarrows full of billion mark currency notes. Can we all agree that that would be “easy money?”  Good.  We also know that hyperinflation leads to extremely high interest rates and extremely low real cash balances, just the opposite of the prediction of the IS-LM model.  In contrast, Milton Friedman would tell you that really tight money leads to low interest rates and large real cash balances, exactly what we do see.

Note the very last comment on the slide, about the significance of deflation.  The rest of the PP slides develop this idea further, and correctly show that while tight money might raise real interest rates, it could lower nominal rates through the Fisher effect.  Thus it could shift the IS curve.  That helps, but it seems to suggest that the IS-LM model can be rescued by switching the argument from nominal to real interest rates. Alas, that won’t work.  The Fisher effect is only one of the ways that monetary shocks impact interest rates.  Tight money also reduces expected future real GDP, and this also shifts the IS curve.  So it isn’t just nominal interest rates that fall, real rates also fell during the 1930s, as expected future real GDP plunged.  The IS-LM model is useless, and should be discarded.  The fact that it is used to derive the AD curve probably explains why I can’t seem to understand how Keynesians use the concept of AD; they are basing it on ideas that make no sense to me.

Here’s a simpler model.  AD is a hyperbola (a given level of NGDP).  This model does not assume NGDP targeting, just as the current AD model does not assume money supply targeting.  Changes in NGDP are caused by monetary policy.  The P/Y split for changes in NGDP is determined by the slopes of the SRAS and LRAS curves.  The LRAS curve is vertical.  Interest rates?  Yeah, they fluctuate a lot.

BTW, the PP slides end up with an excellent Greg Mankiw post from December 2008.  Mankiw recommends the Fed commit to a price level 30% higher in 10 years time.  Had they done so the recession would certainly have been much milder.

On the other hand if Mankiw had been head of the Fed in December 2008 they would have done almost exactly what they did under Bernanke, not what Mankiw recommended in 2008.  Mankiw’s policy views are pretty similar to Bernanke’s views.  Unfortunately there is also the formidable “FedBorg.” Had Mankiw been in charge, it would have been Bernanke who wrote the blog post suggesting the Fed should commit to a 30% higher price level in 10 years.  We are all just puppets, filling out the roles determined for us by blind fate.

Off topic:  Ramesh Ponnuru is right, I see lots of interest in NGDPLT among conservatives.

I have a post on AD over at Econlog, for those not burned out on the issue.

Just to show you that MMs don’t agree on everything, David Beckworth has a excellent post arguing against the Great Stagnation hypothesis.  Marcus Nunes is also skeptical.  In contrast, I accept the Great Stagnation hypothesis.  Fortunately it doesn’t matter for our monetary policy views, as we all favor targeting NGDP and ignoring RGDP.