Archive for April 2012


Krugman on NPR

This morning while driving to work I heard a snippet from a Paul Krugman interview.  One of his comments (in reference to the Bernanke press conference) perked my interest.  I don’t recall the exact words, but he said something to the effect of:

BTW, I think that I am doing him [Bernanke] a favor . . .it allows him to push back against criticism he’s been receiving from the right.

If someone finds a transcript I’d be glad to correct the quotation.  This reminded me of what I wrote just yesterday:

Without the criticism of Bernanke from us market monetarists, and without the criticism of Bernanke from Krugman, DeLong, Avent, Yglesias, Duy, Thoma, etc, etc, Ben Bernanke’s job would be much harder.  Without that criticism, all the pressure on the Fed would be coming from the right, and would be pushing the Fed in exactly the opposite direction from where Bernanke would like to go.  We are helping him, whether he knows it or not, and regardless of how annoying he finds our criticism.

I’m tempted to say “great minds think alike,” but perhaps that would be presumptuous until I win my Nobel Prize.  Seriously, I wonder if he read my post, or if it’s just a coincidence.

He also pointed to all the jobs we could get from fiscal stimulus; 1.3 million to be precise.  He didn’t mention that the Fed policy he criticized (which is basically “QE2 raised core inflation to 2%, and we’re damn well going to keep it right there.”) would trim a few jobs off that estimate.  Indeed about 1.3 million jobs to be precise.

PS.  I’m getting a lot of push back from commenters that I am being naive in assuming that Bernanke is secretly a good guy, who actually wants the Fed to do more.  I’m not sure my view is a compliment, but let’s assume it is.  Krugman said basically the same thing in the interview.  Here’s another way of putting it:  Take the Fed forecast of NGDP growth over the next couple of years.  Say it’s 4.5%.  Now give Bernanke truth serum.  Ask him if given his druthers, he’d prefer the actual rise of NGDP to be 4.5% or 4.7%.  I’m almost certain I know the answer.  That’s all I’m saying.

PSS.  ‘Druthers’ is kind of a strange word, isn’t it?

Real wages are very different from real incomes

I get lots of commenters complaining that monetary stimulus would not work because it would lead to inflation, which would reduce real wages.  This would (they claim) lead workers to buy less stuff.  They are confusing real hourly wages with real income.  In standard sticky wage models, monetary stimulus will reduce real wages and boost real income.  I can’t be sure, but I wonder if Steve Waldman might have made a similar error:

A recession, in the New Keynesian telling, occurs when this stabilization policy is not sufficient. If changes in supply and demand are so great that “sticky downward” prices must fall faster than the targeted rise in the price level, markets won’t clear. If the “sticky downward” price is workers’ wages, then it is employment markets that won’t clear, and we will experience mass joblessness. If this occurs, a cure would be to increase the targeted rate of inflation until real wages fall relative to other goods and services. When real wages fall enough, employment markets will clear again and the recession will end.

In the post-Keynesian story, a depression is driven by an decrease in agents’ willingness or ability to carry debt. Agents “pay for” decreased indebtedness by devoting their income to the purchase of safe assets (including especially their own outstanding debt) rather than spending on real goods and services. Unfortunately, money spent on financial asset purchases does not create income (they are asset swaps), and may not be cycled back into income for producers of real goods and services. So, in aggregate the attempt to reduce indebtedness can lead to a reduction of income that sabotages the attempt to pay down debt. This is the famous “paradox of thrift”. We simultaneously experience unemployment (reduced spending and income to real goods and service providers plus sticky wages means that people get canned) and financial distress (reduced income and fixed debt makes prior debt ever more burdensome). In this story, reducing real wages is not a solution. Real wage reductions might mitigate unemployment temporarily, but they also engender financial distress. Financial distress then causes agents to redouble their efforts to satisfy debts, reducing aggregate income and requiring further reductions in real wages ad infinitum. The only way out of a post-Keynesian depression is to increase real wages relative to the real burden of debt. In the post-Keynesian story, inflation is helpful only if real incomes hold steady, or, at very least, fall more slowly than the real value of prior debt.

That criticism of the New Keynesian model seems slightly misleading, as most versions don’t assume wage stickiness is the key, or that real wages will be countercyclical.  But let’s put that issue aside for the moment.  It seems to me that the final sentence is a non-sequitur, or perhaps is confusing wages with incomes.

Keynes argued that wage and price stickiness were factors in the transmission of nominal shocks into real output changes, but also famously argued that wage cuts probably wouldn’t help, because they would simply push you deeper into deflation.  But that argument has no merit if the central bank is targeting inflation or NGDP (as in Britain today.)  In that case wage cuts can increase employment.  Now that doesn’t mean that a fall in real wages will necessarily be correlated with higher employment—we’ve known for decades that there is no reliable cyclical relationship between real wages and the business cycle.  Indeed I’ve argued that we should stop talking about inflation and real wages entirely, and instead focus on the ratio of hourly wages to NGDP.  That ratio rose sharply in the US during 2009, and I’m almost certain the same happened in Britain.

In fact, in every single macro model ever developed (including Austrian, RBC, monetarist, Keynesian, and Marxist) expansionary policy initiatives are only successful if real incomes don’t fall, because real income is the variable you are trying to expand!  Now I suppose some readers are thinking that I’m nitpicking, and that Steve obviously meant real wages, not real incomes, in that final sentence.  But that won’t work either, as it would make the rest of his claim incorrect.  It is real incomes that determine consumption spending, it is real incomes that determine ability to serve debt.  Not real hourly wages.  Even shifting to an income distribution argument won’t help; as long as the central bank targets inflation of NGDP, it’s almost impossible to tell a story of high unemployment and downward flexible wages.

And yet I oppose policies aimed at reducing wages, as they will not work, and will merely provide a distraction from the need for greater NGDP.  So in policy terms I’m right with my “frenemy” Steve Waldman.  I just don’t think the real wage patterns observed in the UK tell us anything about the relative validity of New or Post–Keynesian models.  I do agree with Richard Williamson, however, that this data suggests supply-side problems play a greater role in the British recession than the US recession.  He has a new post showing Krugman looking at the distorting effect of the VAT increase without first accounting for the decrease that occurred slightly earlier.  I’ve been watching the British situation with great interest and Williamson is clearly right and Krugman is clearly wrong.

That’s not to say Britain doesn’t also have major demand-side problems, as Britmouse has ably demonstrated.

The definition of a successful country

Tyler Cowen recently linked to this amusing story:

A Swiss politician has prompted a heated debate after suggesting that there are too many German immigrants in her country. “We really have too many Germans in the country,” Natalie Rickli, a member of Switzerland’s parliament with the right-wing populist Swiss People’s Party (SVP), said during a television talk show on Sunday.

.   .   .

She said that she had already received a lot of mail from Swiss people saying that they had lost their jobs because cheaper Germans had been hired instead.

.   .   .

There are around 200,000 Germans living in Switzerland, where the unemployment rate is currently at 3 percent. The country has a total population of 7.6 million. Many Germans in Switzerland work in service sector jobs, attracted by higher wages than they would earn at home.

More good reasons to favor radical decentralization and hyper-democracy.  No, not because it leads to xenophobic immigration policies (few countries are as open to foreigners as Switzerland), rather because it produces such economic success that those low-wage foreigners stealing all the jobs are Germans.

PS.  In proportion to population, the 200,000 Germans in Switzerland would be like 8 million Germans moving to the US.  (Yes, lots did move here, but not recently.)

The absurdity of claims of cultural superiority

Here’s a recent article on suicide in Greece:

Before the financial crisis began wreaking havoc in 2009, Greece had one of the lowest suicide rates in the world – 2.8 per 100,000 inhabitants. There was a 40 percent rise in suicides in the first half of 2010, according to the Health Ministry.

There are no reliable statistics on 2011 but experts say Greece’s suicide rate has probably doubled to about 5 per 100,000. That is still far below levels of 34 per 100,000 seen in Finland or 9 per 100,000 in Germany.

.   .   .

Another important factor behind the low suicide rate is that Greeks have extremely close knit families as well as a highly communicative and expressive culture.

“Greece is a country where everyone will talk to you,” said Sideris, the Athens psychoanalyst. “You’ll always find someone to share your suffering with and someone’s always there to help.

“It’s not only the good weather. It’s the powerful network of support that has made the suicide rate in Greece so low. It’s still there but this crisis is still too much for some people.”

I’ve previously argued that there is no such thing as inferior and superior cultures, just cultures that evolve to adapt to different needs.  I don’t doubt that culture plays some role in Greece’s economic problems, perhaps by contributing to high rates of tax evasion.  But this article is a reminder that cultural attributes (such as “close knit families”) that are a drawback in one area of life might be an advantage in another.

I think some people fail to see this because they are (naturally) attracted to their own culture, and see different cultures as being objectively “wrong.”

Ben has a job to do, and so does Paul

Binyamin Appelbaum recently made that following claim:

It’s worth reading the entirety of this response from the Federal Reserve chairman, Ben S. Bernanke, to a question I raised at a news conference on Wednesday. It’s a very clear statement of his views on what is probably the most important current question of economic policy: Why won’t the Fed do everything in its power to reduce unemployment?

Actually, it’s as clear as mud.  Let’s start with what we know for a fact:

1.  If the Fed never aims for an inflation rate that is higher or lower than 2%, then it’s an inflation targeter.

2.  If the Fed had a single mandate to produce 2% inflation, with no regard for unemployment, then it would not have a dual mandate.

3.  The policies described in points one and two are identical.  Two policy regimes that call for exactly the same policy in 100% of all cases are actually a single policy regime, perhaps with two names.  That which has no practical implications, has no theoretical implications.

4.  Ben Bernanke has repeatedly emphasized that he supports the dual mandate, and puts equal weight on both components of that mandate.

5.  Because of points 3 and 4, we know for a fact that Ben Bernanke does not support a 2% inflation target on all occasions.

6.  Bernanke’s response to Binyamin’s question seemed to suggest he supports a 2% inflation target under all circumstances.  But we know that is not true, hence there is nothing “clear” about Bernanke’s response.

Now let’s talk about what we don’t know for sure, but seems likely:

1.  Bernanke has indicated in the past that policy may need to aim for more or less than 2% inflation over the short run, with the proviso that the Fed would gradually bring inflation back to 2% in the longer run.  (BTW, this occurs when AS problems lead to above 2% inflation despite economic slack.  With no AS problems, inflation targeting is all you need.)

2.  He’s suggested that the Fed might need to temporarily shoot for slightly higher than 2% inflation when unemployment is high, and vice versa.

3.  We also know that the Taylor Rule, which almost everyone seems to believe was roughly the Fed’s approach during the Great Moderation, calls for slightly higher than 2% inflation during periods of high unemployment, and vice versa.

4.  Putting these three points together, it seems overwhelmingly likely that Bernanke would prefer slightly above 2% inflation during periods of high unemployment, and slightly below 2% inflation during periods of low unemployment.

So why didn’t he say so?  Now we need to get even more speculative:

1.  One possibility is that this answer should be seen as a response to Krugman’s argument that we should not just aim for slightly higher than 2% inflation in the short run, but should actually raise the long term inflation goal to something like 4%, in order to lower real interest rates, and also to make liquidity traps less likely.  Bernanke probably sincerely opposes that policy, but that doesn’t mean he wouldn’t prefer to see a bit more NGDP growth and inflation right now.

So why didn’t he make both points, why not say he wants a bit more inflation right now, but also wants to keep the Fed’s long term 2% inflation target?  I can think of several reasons:

1.   In late 2010 he ran into a firestorm when he called for higher inflation.  At the time he was merely calling for boosting core inflation up from 0.6% to 2.0%, which should have been incredibly uncontroversial—even the hawks should have applauded.  Now imagine he says “we are going to try to push inflation a bit above 2%.”  That actually is the implication of the dual mandate, but nonetheless all hell would break lose.  I think he might honestly believe that it could be a setback for the doves.  He’d rather move quietly in that direction.

2.  A Fed Chairman, like virtually all top officials in government, is essentially forced to defend the policy of the institution they head.  Or resign.  He probably feels he can do more good from the inside than the outside.  Some people complain that I am being too charitable to Bernanke.  Actually, I’ve had lots of exactly the sort of highly critical posts that others have provided.  But let’s get real for a moment.  There are numerous press reports from journalists with access, like Jon Hilsenrath, that paint a clear picture of Bernanke being a dove who is constantly trying to nudge the Fed in a more expansionary direction.  All the Fed actions (QE1, QE2, Operations Twist, the 2014 low rate promise, etc, were things that Bernanke came up with, and pressured the Fed to adopt.  There’s absolutely no reason to think the picture painted by these well-informed journalists is wrong.

3.  In the previous press conference there were two pointed questions that basically criticized the Fed for not doing more.  And both times Bernanke answered something to the effect that “no one can deny we’ve been extraordinarily accommodative, blah, blah, blah, but your point is well taken, the economic data do suggest reason for even more stimulus.  It’s under active consideration.”  That’s from memory, not exact words.  Now take a look at the exact words in this recent conference:

Likewise, we have been aggressive and creative in using non-federal-funds-rate-centered tools to achieve additional accommodation for “” for the U.S. economy. So the “” the very critical difference between the Japanese situation 15 years ago and the U.S. situation today is that Japan was in deflation. And, clearly, when you’re in deflation, and in recession, then both sides of your mandate, so to speak, are demanding additional accommodation.

In this case, we are not in deflation. We have an inflation rate that’s close to our objective.

Now, why don’t we do more? Well, first, I would, again, reiterate that we are doing a great deal. The policy is extraordinarily accommodative. We “” and I won’t go through the list again, but you “” you know all the things that we have done to try to provide support to the economy.

Here’s how I translate that:

“Give me a break Paul; you know I can’t throw my colleagues under the bus at a public press conference.  But I’ve worked really hard to persuade them to do one unconventional move after another.  And I’m still working for additional accommodation later this year.  But we don’t live in a perfect world; it’s much harder to lead a big institution like the Fed than take pot shots from a NYT column.”

Just to be clear, I agree with Krugman’s criticism of the Fed.  And I can even agree with his specific criticism of Bernanke in one sense.  Just as Bernanke is almost forced to defend polices that may not be 100% optimal in his eyes, a journalist is duty-bound to criticize the public statements of government officials—regardless of what they think the official privately believes.  I’ve also criticized Bernanke.

Free Exchange has an anti-Bernanke piece by Ryan Avent and a pro-Bernanke piece by Greg Ip.  Both are excellent, and in a sense both are correct.  They are simply looking at the picture from a different perspective.

Without the criticism of Bernanke from us market monetarists, and without the criticism of Bernanke from Krugman, DeLong, Avent, Yglesias, Duy, Thoma, etc, etc, Ben Bernanke’s job would be much harder.  Without that criticism, all the pressure on the Fed would be coming from the right, and would be pushing the Fed in exactly the opposite direction from where Bernanke would like to go.  We are helping him, whether he knows it or not, and regardless of how annoying he finds our criticism.