Archive for June 2015


Federal revenue in 2013

Jason Smith has a post that points to a very interesting fact about 2013—federal revenue from asset sales soared, primarily due to dividend payments by Fannie Mae and Freddie Mac.  By my calculations the revenue from asset sales increased by about $111 billion, from $53.6 billion in 2012 to $164.7 billion in 2013.  This is certainly a non-trivial portion of the $500 billion in deficit reduction that occurred during 2013, and in my view offers a far better argument than pointing to things like state and local government (which is just as endogenous to the Federal government as private investment.)

I don’t claim to understand the Keynesian model, so I won’t even pretend to comment on the importance of these payments.  Until recently I thought Keynesians viewed deficit reduction done via reduced transfers and higher taxes as being “contractionary.”  You know, the sort of austerity that you see in Greece.  Now I’m not so sure what they think. FWIW, at the time Matt Yglesias thought these GSE dividends were a contractionary “disaster.”

The only problem is that this gusher of federal revenue is actually an economic disaster.

In normal times, government coffers filled with dividends would be good because they could be put to some use. The government could spend that money on building Hyperloops or repairing schools or vaccinating children. Alternatively, the government could do the exact same things it was doing before, but reduce taxes and put more money in working peoples’ hands. But that would require a functioning political system. Today’s gridlocked Congress isn’t doing anything with the money.

Still, under ordinary circumstances the reduced government borrowing that results from a dividend windfall could be useful. A smaller deficit often allows the Federal Reserve to run lower interest rates without sparking inflation. That makes it easier for people to buy houses or for firms to invest in new production. Today, though, the Fed’s preferred measure of inflation is running at its second-lowest level on record, even though short-term interest rates have been at zero for years now.

So the Treasury is earning tons of Fannie/Freddie money. But the profits aren’t letting us spend more, they aren’t letting us tax less, and they aren’t freeing up private investment capital either. They’re doing nothing. It’s as if the money were sitting around as cash in a storage locker somewhere.

PS.  There are all sorts of “Ricardian equivalence” arguments as to why Matt might be wrong—that those payments to the Federal government don’t matter.  But do Keynesians believe in Ricardian equivalence?

PPS.  Yglesias also has an excellent new post on the Chinese stock market:

On the other hand, I should say that when I went to China in 2008 I heard from a lot of smart foreign observers that the country was in the midst of an unsustainable stimulus-driven boom that would surely crash someday soon. Now it’s seven years later, and all the smart foreign observers say China is in the midst of an unsustainable stimulus-driven boom that’s in the midst of collapsing. And since no country goes forever without an economic contraction, surely China really will see its long boom come to an end and the economy fall into recession one of these days. Maybe even tomorrow!

But it’s dangerous to be too confident you know what’s going on. Nobody really predicted the boom that’s unfolded over the past six months, so nobody really knows what the future holds.


When the paradoxical becomes mainstream

Market monetarist ideas often sound quite paradoxical to the uninitiated.  Back in 2008 and 2009 it was a struggle to get anyone to even pay attention.  How are we doing today?  One indication is provided in the cover story of a recent Economist magazine:

The danger is that, having used up their arsenal, governments and central banks will not have the ammunition to fight the next recession. Paradoxically, reducing that risk requires a willingness to keep policy looser for longer today.

.  .  .

When central banks face their next recession, in other words, they risk having almost no room to boost their economies by cutting interest rates. That would make the next downturn even harder to escape.

The logical answer is to get back to normal as fast as possible. The sooner interest rates rise, the sooner central banks will regain the room to cut rates again when trouble comes along. The faster debts are cut, the easier it will be for governments to borrow to ward off disaster. Logical, but wrong.

Raising rates while wages are flat and inflation is well below the central bankers’ target risks pushing economies back to the brink of deflation and precipitating the very recession they seek to avoid. When central banks have raised rates too early””as the European Central Bank did in 2011″”they have done such harm that they have felt compelled to reverse course. Better to wait until wage growth is entrenched and inflation is at least back to its target level. Inflation that is a little too high is a lot less dangerous for an economy than premature rate rises are.

Here’s the technical explanation.  When the Fed tightens monetary policy, the Wicksellian interest rate falls as the market interest rate rises.  Why is that important?  Because the Fed adopts expansionary monetary policies by reducing its target rate to a level below the Wicksellian equilibrium rate.  The lower that rate, the less room central banks have to conduct “conventional” monetary policy (i.e. raising and lowering short term rates.)  So if you want the ability to cut rates below the Wicksellian equilibrium rate in the future, the best way of insuring that you can do so is by not raising them today.

Notice the Economist suggests that the ECB’s tight money policy of 2011 triggered the double-dip recession.  This is also progress.  A few years ago I recall economists claiming that modern recessions were different.  The idea was that earlier recessions were caused by the Fed raising rates to combat inflation, whereas modern recessions were caused by balance sheet issues.  This is wrong, as you can see from this graph of ECB target rates:

Screen Shot 2015-06-19 at 9.51.27 PM

The ECB raised rates in July 2008, and then twice in the spring of 2011.  In 2008 they raised rates because they were worried about high inflation.  In 2011 they raised rates because they were worried about high inflation.  Of course in both cases they made a mistake, as NGDP growth was weak.  But inflation is the ECB’s special obsession.  Now for the results.  In 2008 the tight money policy caused a mild recession to suddenly become much more severe.  This economic downturn sharply reduced the Wicksellian equilibrium rate, so that even later reductions in interest rates were not enough to make the policy expansionary in an absolute sense.  And in 2011 the tight money policy also caused a recession, and again later rate cuts were not enough to turn things around.  Only when the ECB adopted QE did monetary conditions improve (slightly.)

Before Americans feel too smug about this sorry record, recall that the Fed refused to cuts rates in the meeting after Lehman failed.  Their excuse?  Worry about high inflation.

I’ll end with a quote from Gandhi:

First they ignore you, then they ridicule you, then they fight you, and then you win.

PS.  The rate increases of 2008 and 2011 do not, by themselves, tell us anything about the stance of monetary policy.  For that you look to NGDP growth.  I simply include them for the “people of the concrete steppes”, who complain that central banks didn’t “do anything” to cause the recent recessions.  Yes they did.

PPS.  The Great Recession was triggered by a Fed decision in December 2007 to cut rates by 1/4% rather than 1/2%. Frederic Mishkin and Janet Yellen understood what a horrible mistake the Fed was making.

PPPS.  Over at Econlog I have a new post comparing fiscal policy during 1937 and 2013.

Three cheers for the NBA draft

I know that this blog is supposed to be about economics, so let me start off by pretending to discuss economics, before getting to the interesting stuff, tonight’s NBA draft.

No, the draft is not unfair.  No, it doesn’t violate antitrust rules.  Although NBA teams compete in an athetic sense, they don’t compete in an economic sense—they cooperate.  The economic competitors to the Chicago Bulls are not the San Antonio Spurs, the competitors are the Chicago Blackhawks, Chicago area movie theaters and nightclubs, and Chicago area TV programming.  It helps to think of the NBA as a single firm, with lots of franchises, which collaborate to produce the most entertaining product possible–in a vastly larger entertainment “industry”.  I’ve never heard anyone complain that Cirque du Soleil is violating antitrust laws if they assign acrobats to one of their 19 stylish circuses.

For NBA fans, the draft is very interesting precisely because a single player can make a much bigger difference in basketball than in the other major team sports.  No quarterback or pitcher, no matter how good, could take a bunch of misfits to the championship series the way Lebron did this year.  And now that the best players come out early, there’s a lot of uncertainty as to how good they’ll end up being once they get to the NBA.

Today I’d like to point to a possible inefficiency or bias in the drafting process.  Teams picking at the top (say the first or second pick) seem to overrate the importance of big men.  Non-basketball fans might be wondering what I mean, aren’t all basketball players “big men?”  It’s relative, I’m talking mostly about centers, or very big power forwards.  I looked back over the drafts since 1965, and didn’t find a single example where a team picked a small guy at one or two over a big guy, and strongly regretted it.  In contrast, there are 9 cases of where a team picked a big guy over a small guy, and clearly regretted it.  (And there probably would have been 10 if Len Bias hadn’t died.)  I looked at picks one and two over picks two or three—obviously if you look at the entire draft you can find hidden gems, I’m looking at a choice between the top few prospects.

Even worse, the NBA is rapidly evolving in the direction of centers being unimportant.  In the recent playoffs, teams would often go without any center at the end of games, when it mattered most.  The team that won the championship was able to do this for long periods, without the big men on the other team being able to take advantage.  So this is an even stronger argument to draft small.  And yet once again, the top pick and probably the top two picks are expected to be big men.

Here are some botched draft picks, big over small:

1966:  Bill Buntin (2) over Gail Goodrich (3)

1984:  Sam Bowie (2) over Jordan (3)

1990:  Derrick Coleman (1) over Gary Payton (2)

1998:  Michael Olowokandi (1) over Mike Bibby (2)

2001:  Kwame Brown  (1) over anybody

2003:  Darko Milicic (2) over Carmelo (3) Bosh (4) and Wade (5)

2005:  Andrew Bogut (1) over Deron Williams (3) and Chris Paul (4)

2007:  Greg Oden (1) over Kevin Durant (2)

2009:   Hasheem Thabeet (2) over James Harden (3)

If you define “bigs” more generously, you have one possible error in 2011, when Evan Turner (2) went ahead of Derrick Favors (3).  Favors has finally emerged as arguably the better player.  But then what about 2013, where the semi-big Anthony Bennett (1) went ahead of Oladipo (2)?

If the Lakers take Russell over Okafor and it doesn’t pan out, it would be the first time in at least 50 years that this happened.

BTW, I vote for OKC having the best string of drafts ever, getting Durant (2) Westbrook (4) and Harden (3) in three consecutive drafts, arguably three of the top 6 players in the league right now.  (The others are obviously Lebron, Curry and AD.) Too bad OKC traded Harden.

Because I’m a Wisconsin fan you might be wondering what I think of our two prospects.  The most notable aspect of Kaminsky is how bad he was in his first couple years, and how rapidly he improved in his final two.  He started out as a guard in high school, and can do a lot of things pretty well.  Fits well in the new NBA, which emphasizes the 3 over traditional centers.  Dekker has a higher ceiling than Kaminsky but a lower floor.  It all depends whether he can consistently hit the three.  Don’t pay attention to lazy pundits who always compare people to other players of the same race; Dekker’s closest comp may be Richard Jefferson.  He’s surprisingly effective in the open floor, especially when driving to the basket.

PS.  Think drafting is easy?  Take a look at picks 11 through 16 in 2008, and then picks 21 through 26 from the same draft:

11-16:  Jerryd Bayless, Jason Thompson, Brandon Rush, Anthony Randolph, Robin Lopez, Marreese Speights

21-26:  Ryan Anderson, Courtney Lee, Kosta Koufos, Serge Ibaka, Nicolas Batum, George Hill

Which 6 would you rather have?

PPS.  I’m opposed to the current draft lottery for obvious tanking reasons.  I favor all of the non-playoff teams having an equal chance for any of the first 14 slots.  Philadelphia is a disgrace to professional sports.

PPPS.  I don’t like the 3 point shot—makes games too one dimensional.  Reminds me of the way tennis was ruined when changes in technology made it impossible to employ the wide variety of shots that McEnroe used to use.

Are Keynesians and non-Keynesians moving toward a consensus on deficit reduction?

Recently I see some positive signs of consensus.  Back in 2012 there seemed to be a huge split between the “deficit scolds” who insisted that we shrink the budget deficit, and Keynesians who suggested that it was a nutty idea.  At the time, I was under the misapprehension that many Keynesians thought a massive and sudden reduction in the federal budget deficit would constitute “austerity” and hence would slow growth.  Now that the dust has settled, we can calmly look at the data:

Calendar 2012:  Budget deficit = $1061 billion

Calendar 2013:  Budget deficit = $561 billion

A reduction of $500 billion in one year.  I used to be under the impression that Keynesians thought this would be a disastrous policy that sharply slowed growth. I’m now happy to report that I was wrong. (Who says I never admit I was wrong?) The new, new, new Keynesian consensus seems to be that the deficit reduction shown above does not constitute the sort of austerity that would be expected to slow growth.

I was under the impression that massive tax increases and cuts in transfer spending were contractionary.  Now I’m happy to report than only cuts in government consumption seem to count.  (Has Christina Romer been informed yet?)

So we have a new consensus, which spans the ideological spectrum.  Yes, Federal government officials, go ahead and slash the budget deficit by $500 billion in a single year by raising taxes and cutting spending.  Just don’t touch government consumption.  It’s OK, it won’t slow growth.  Who says economists can never agree on anything?

PS.  This post could be interpreted straightforwardly or sarcastically.  You might be surprised to know that even though I wrote the post, I don’t know which interpretation is correct.  Really.  I honestly don’t know what Keynesians think of the $500 billion in deficit reduction, mostly accomplished through taxes and transfers.  I welcome Keynesian commenters who will educate me on this point.  (I.e., if they really don’t think 2013 was austerity that would slow growth, then we really are achieving a consensus, no sarcasm intended.  It makes deficit reduction much easier.)

Keynesians should have supported the 2014 Japanese tax increase

Perhaps because the recent recession was so deep, many people seem to have forgotten the distinction between cyclical and long run issues.  Aggregate demand policies are important in certain respects, and you’d be hard pressed to find any blogger who has complained more than I have about AD shortfalls.  But nonetheless AD is a cyclical problem, a short run problem.  AD can’t fix structural unemployment, and it has nothing to do with income inequality.   It also has nothing to do with big government.  It also has nothing to do with “interventionism.”  When I read that some conservatives are suspicious of AD, it makes me think they are suspicious of reality.  Any possible policy regime, including complete laissez faire, has very important implications for the path of AD over time.

I was particularly dismayed to see that some Keynesian economists opposed the 2014 Japanese tax increase, and then later claim the policy failed.  Both views are absurd.  Here’s the budget situation in Japan:

Screen Shot 2015-06-24 at 10.59.48 AM

The central government is only collecting about 10% of GDP in taxes?  You have to be kidding me.  And the problem has been going on for decades, and it’s getting worse?  That’s not the Keynesian economics that is taught in the textbooks. I was taught you run deficits when unemployment is high, and surpluses when unemployment is low.  Is there some new theory I haven’t heard about yet?

OK, but doesn’t Japan have lots of unemployment?  Everything is relative, but I’d say their unemployment problem is less today than at any other time in the past 18 years, with an official rate of 3.3%.

Screen Shot 2015-06-24 at 11.11.41 AM

Yes, in the 1980s it was even lower, at around 2%.  But if not now, then when?  And how do the Keynesians claim that this policy failed?  In the Keynesian model a tight fiscal policy fails if it is done when unemployment is high, or if it is done when the rate is low, but the policy sends unemployment much higher.  But neither is true in this case. Unemployment was low when the tax was enacted, and has since fallen even lower. How is that a failure?  Perhaps some of the Keynesians that got the facts wrong in the US in 2013, and also in Britain, will now step up and admit they were wrong in claiming that the Japanese tax increase failed.  Japan’s policy was an almost perfect example of Keynesian economics in action.  You fix the roof while the sun is shining.  You fix your long run fiscal shortfalls when the unemployment rate is low.  Sales surged right before the tax increase and dropped sharply immediately after (affecting RGDP), but firms knew this was just consumers beating the tax increase, and hence companies did not lay off workers.

And please don’t say that deficits are no problem because interest rates are low, and will remain low for many years. “Many years” is not forever.  Suppose the Japanese debt eventually gets up to 400% of GDP, and interest rates rise to 5%. Then it would take 20% of GDP to simply service the debt.  But they only collect 10% of GDP for all central government activities! (I know, they can borrow 20% of GDP each year to service the debt.  Why didn’t I think of that?)

The other argument is that the net debt is lower, as the BOJ has bought up a lot of debt.  But modern central banks no longer “monetize the debt”, they swap interest-bearing reserves for interest-bearing bonds.  If interest rates rise they’ll either have to sell off the debt (which increases the stock of net debt held by the public) or pay interest on the debt (and remember that central banks are de facto part of the government), or let hyperinflation occur.

When something seems too good to be true, it usually is.  The idea that the Japanese can keep financing a modern welfare state with more and more elderly people by collecting barely over 10% of GDP in taxes at the federal level seems too good to be true.  I submit that the reason it seems too good to be true, is because it is too good to be true.

PS.  Any commenter who criticizes this post loses the right to ever again criticize me for anti-Keynesian views on fiscal policy.  This post is 100% consistent with standard textbook Keynesian economics.