Paul Krugman recently criticized this view:

One of the odd things about the people arguing that we must raise interest rates to head off bubbles “” Raghuram Rajan, Martin Feldstein, the BIS, and so on “” is the near-universal assertion among this group that just a little rate increase can’t do any real harm. (Just a thin little mint). After all, rates are so low!

He’s right that even a small rise in short term rates can do a lot of harm, but I’d add that another problem with the conservative argument is that they don’t seem to realize that interest rates are a lousy indicator of the stance of monetary policy. When I studied economics that was a point that conservatives emphasized.

Even small increases in interest rates in the US (1937), Japan (2000 and 2006), and Europe (2011) drove each economy right back into deflation and/or depression.

Monetary policy has probably become easier over the past few months. I say ‘probably’ because we lack a NGDP futures market. But consider that stock prices have not changed much in the last few months, and the interest rate at which future cash flows are discounted has risen substantially. We can infer that expected future nominal cash flows are now larger than a few months ago. This doesn’t mean that expected future NGDP has risen, but that seems likely. Note that earlier when I discussed the response of the stock market to recent tapering news I forgot to account for the higher discount factor. I’m indebted to a commenter whose name I forget for pointing that out.

I’m still puzzled by the response of long term rates to the tapering talk. But if long rates always moved the same way in response to monetary news, then interest rates would no longer be a lousy indicator of monetary policy.

PS. Commenter Andrew pointed out that Bernanke recently endorsed targeting the forecast. That’s great news.

Paul Krugman did some excellent columns in the 1990s on the need for sweatshops in third world countries. He still believes they are necessary, but has effectively reversed his position by calling for tougher standards on working conditions in developing countries. These regulations would hurt the poorest of the poor by moving factories from places like Bangladesh to places like China, which have better (less bad) working conditions.

Krugman justifies this position by pointing to the following data:

At this point, however, there really isn’t any competition between apparel production in poor countries and rich countries; the whole industry has moved to the third world. The relevant competition is instead among poor countries “” Bangladesh versus China, in particular. And here the differences aren’t as dramatic: McKinsey (pdf) estimates Bangladeshi productivity in apparel at 77 percent of China’s level

I’m no expert on this subject, but the study seems fishy. Obviously Bangladeshi wages are nowhere near 77 percent of Chinese wages. Why not? I’d guess that while factory productivity in Bangladeshi textile mills is 77 percent of Chinese levels, total productivity’s less than a third of Chinese levels, as infrastructure like roads, ports and electrical power in Bangladesh is far below Chinese levels.

I suspect that Krugman wants to believe that government regulation can improve the appalling working conditions in Bengali factories. So would I. But wanting to believe something doesn’t make it true.

PS. Here’s a policy that would enrich both Bengalis and Americans. Have 747s fly over Bangladesh and dump $100,000,000,000 out of the cargo bay. QE will boost US RGDP, and foreign aid will help the Bangladeshis.

Yichuan Wang has a very nice post on “reaching for yield”. Everyone talks about it but he’s the first I’ve seen who has actually thought through the implications.

Whenever I hear of a trendy new idea that’s not consistent with economic theory, I’m immediately skeptical. I used to associate these things with liberals, but now conservative economists are just as bad.

Here’s the punchline:

The greatest irony is that only after the Fed tightens do we realize that the Fed didn’t need to tighten at all. But now that it has, it doesn’t look like the financial impacts will be that large after all.

Special thanks to my daughter for helping me with the #%@$@&%¥â‚¬£%#@$& iPad.

During the early stages of the recession there were all sorts of “structural” theories of unemployment.  One popular theory claimed that housing had been overbuilt, and hence the job losses in home-building were due to “reallocation” of labor, not falling AD.  That idea never made much sense as an overall theory of unemployment, as aggregate employment held up well during the great housing crash of January 2006 to April 2008.

Another theory pointed to the “end of retail,” the idea that retailers like Border’s and Circuit City were becoming obsolete dinosaurs in the age of Amazon.  It is possible that retailing will gradually decline over time, but we now know that the huge drop in retailing jobs during 2007-09 had nothing to do with the end of retailing:

A loss of 1.2 million retailing jobs during 2007-09.  And it was mostly due to falling AD.

Not much blogging for the next few weeks.

Someone must have told the New York Times that Market Monetarist Theory was hot!

HT:  Marcus Nunes

Update:  As usual, the NYT had impeccable timing.  They do this story on the day when the “liquidity trap” clearly ended.