A few of my mistakes
Other bloggers have recently listed some important mistakes they made. The trick is to decide on the number. Pick too few and you will seem too cocky, unable to see your own faults. But pick too many and people will think you are bragging about how brutally honest you are. So I’ll pick 10:
1. In the 1970s I thought we were on the road to serfdom. I bought the whole Mancur Olson argument that modern democracies gradually became more statist, as they get captured by special interest groups. (I haven’t read him in a while, so I am probably oversimplifying.)
2. In the 1970s I thought communism was more of a threat than it turned out to be. (Ditto for Iraq in 2003.)
3. In the 1970s I thought monetary policy operated with long and variable lags, and thus fine-tuning would make things worse.
4. In the 1970s I thought the Nordic economic model was much more seriously flawed than it really is.
5. I used to think moral and aesthetic beliefs were ‘”mere opinion” and scientific beliefs were “objective facts.”
6. I used to think I was smarter than other people who are just as intelligent as I am. Actually I sort of still believe this, but at least now one half of my brain knows how silly the opinion held by the other half of my brain really is.
7. In 2007 I thought it very unlikely that there would be a severe US banking crisis.
8. In 2007 I thought the Fed would be able to avoid a Japanese-style zero rate trap.
9. I predicted that aggressive QE would raise long term interest rates, a view which seemed to be refuted by the response on T-bond yields to the March 2009 Fed QE announcement.
10. I thought Brett Favre really was going to retire this year, after he said he was going to. Arguably my most embarrassing error.
I’d like to talk about number 9 for a moment. Any effective monetary stimulus would be expected to raise long term rates. We have plenty of examples of that occurring. My favorite is the surprise stimulus announcement of January 3, 2001, which caused long term (nominal) rates to soar. Thus I was shocked to see long term rates fall sharply on the day of the March 2009 QE announcement.
I don’t have a good theory for why that happened. One could point to the fact that they quickly reversed, and soon rose far above the pre-announcement level. So maybe markets made a mistake and I was right all along. But that means the EMH is wrong, a theory I hold even more dearly. So either way I’m screwed.
If I had to guess I’d say it might have something to do with the type of stimulus. It didn’t so much raise the monetary base (indeed the Fed was correct in denying that it really was QE) rather it changed the composition of their balance sheet. Even so, other markets (stocks, foreign exchange) reacted as if it was bona fide monetary stimulus. So I am not really satisfied with that explanation either.
I am reluctant to form a firm opinion based on a single observation, so I will watch market reactions to other QE-type actions, to see if a pattern develops. If I was forced to critique my own blog, the market response to the Fed’s March 2009 “QE” would be my number one weapon.
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5. September 2010 at 10:47
With the exception of 5 and 10, I am right there with you.
I guess I still believe in replicable experiments and scientific fact, so I don;t know what you mean by No. 5. I am not a football fan any longer (Los Angeles has been bereft of the NFL since forever) so I have never been wrong about Mr. Favre.
I never thought I would see the name Mancur Olsen again. I liked his book too, though it has been a couple decades…..okay, maybe three decades…
Actually a spin on Olsen has how well the federal rural welfare state and the USDA has fortified themselves against all comers…
5. September 2010 at 11:11
With respect to Mancur Olsen, “The Logic of Collective Action: Public Goods and the Theory of Groups” was part of the reading list when I took “Political Order and Change” at Chicago in the early 1980s. It made a deep impression on me and I consider it to be one of the most important books of the 20th century.
5. September 2010 at 11:55
are there any economists who have done substantial important new work in the past 25 years (i’m trying to rule out people like Solow and Arrow) who you think are smarter than yourself, or are you basically saying that you view yourself as just as smart as anybody out there?
5. September 2010 at 12:14
Benjamin, Number 5 is hard to explain, I am referring to the ideas of Richard Rorty, which I accept. Many things once regarded as scientific facts, even proven through experiment, are later regarded as wrong. That doesn’t mean I don’t believe many scientific facts–I do. But I also believe many moral and aesthetic truths will hold up over time. Like the theory that murder is wrong. I used to group things into two categories; things we regard as so (murder is wrong) and things that are actually so (you can’t go faster than the speed of light.) But on closer examination I just don’t think that that dichotomy means anything. Rather there are things we are more or less confident about, or that are more or less useful, and that’s all we can say. We can’t draw back the curtain and know for certain what is “really so.”
Mark, Yes, I probably shouldn’t have suggested he was wrong. His theory is still a part of the puzzle, but there are other pieces that ending up pushing back statism. After all, it was my failed prediction, not his.
5. September 2010 at 12:28
qq, You asked;
“or are you basically saying that you view yourself as just as smart as anybody out there?”
Wow! I hope I didn’t say that. I don’t think I did. Most of the economists at any of the elite PhD schools are smarter than me. I won’t name specific bloggers, because that would implicitly denigrate those I don’t name. But lots of the bloggers I like and lots of the bloggers I dislike are much smarter than me.
Did anyone else read me as making that claim? If so a correction is needed.
What I meant is that I used to think my opinions were better than those of someone equally intelligent. I don’t any longer.
Any success I have had blogging is due to luck, I happened to devote my life to researching the Great Depression, the Japanese liquidity trap, and forward-looking monetary policies. Anyone else who did the same could do what I am doing.
5. September 2010 at 13:23
Scott,
It was number 6. You obviously didn’t directly say there was nobody smarter than you, but the comment also didn’t mention anybody smarter than yourself — it just said some people were your equals. Anyway, I see what you’re saying now.
all of that said, Bernanke spent a long time studying the same stuff, and I don’t think he really came out with the correct understanding (at leat as far as financial frictions are concerned). In particular, I find Chris House’s takedown of Bernanke and Gertler in the JME to be compelling. Moreover, BG and the others in that literature seem to want credit spreads to be about default risk, even though the finance literature finds that they’re driven almost purely by time-varying risk premia.
5. September 2010 at 14:56
Scott,
With regard to your comments on #9 and EMH, you have also stated in a previous post that you made some money getting into stocks as they started rising from their March 2009 bottom(you mentioned Roubini would have led you wrong on this).
So, presumably you got lucky, benefited from different financial interests than many in the market after the crash(less debt, smaller financial hit, etc.), or perhaps EMH is less than semi-strong,at least in some circumstances.
What is most interesting though is that you chose to try at all, given your stated beliefs.
5. September 2010 at 15:08
I have a good theory for #9. Chartalism.
The money to purchase government issued debt comes the government deficit spending. Note that if you accept Chartalism, you can keep the EMH for a while – at least until I get to that nearly worthless idea.
I suspect if you were wrong about #9 with recent U.S. dynamics, you’re also wrong about what happened to Japan in the last 20 years.
I grew up economically on the floor of the Chicago Mercantile exchange. I guess you could call that one of the actual homes of bond vigilantes. So my DNA was inscribed with “Governments gonna issue debt, therefore bonds are going lower.” when I got my badge for the floor.
But if you follow the math for Chartalism, then you end up with “government deficit spending creates money” as an identity. It took me nearly 18 months to accept it as being true, but god it makes understanding the modern bond markets a ton easier.
So, if you have:
1. A ton of deficit spending
2. by the country with the world’s reserve currency
3. during a time of low demand and poor investment choices
then the money created by the deficit spending will likely flow into purchasing those government bonds.
A very similar dynamic is happening in Japan. How can the country with one of the largest debt to GDP ratios in history have such low borrowing costs for so long? Chartalism gives us a clear and easy to understand answer.
5. September 2010 at 16:23
Mr. E.,
I’ve had thoughts in that direction, after reading some economists and others espousing that point of view.
It made me start thinking that maybe the dominant macro paradigms are flawed in some ways. I asked a question of Scott about whether the Fed can just buy US debt and retire it, but he correctly pointed to how naive, as in ignorant, that idea was.
However, I just couldn’t get past the feeling that many are looking at things the wrong way and that what may be some deeper understanding is hiding behind some rigid thinking.
5. September 2010 at 17:01
Regarding the bond market, here’s my stab at an explanation…
With any Fed easing, isn’t there a tension between how much the easing will affect growth vs credit conditions? Suppose that we had been in a typical tight monetary situation such as in 1982 and the Fed eases. We would expect bonds to rally, even though we expect growth to increase, correct? And the reason is that we expect the ease in credit conditions to outweigh the increase in growth, thus interest rates should fall.
My guess is that there were two warring impulses within the bond market in March 2009: an ease in credit conditions but also an increase in growth expectations. The question is which one is greater. It’s not always clear. Furthermore, throw in the question of the US inflation premium going forward and deducing the correct price is very tricky.
For the stock market, it’s an easier call. Growth expectation increased moderately and whether the credit ease component is greater or less than the growth expectations is less important.
Also, remember that the stock market bottomed on March 6. The British had announced a QE and the US stock market anticipated a Fed announcement coming relatively soon.
You have mentioned before (such as the 1987 crash) that you have to look at several markets in order to deduce growth expectations for the economy. I think this is also one of those cases.
5. September 2010 at 17:10
Also, it might take several days for the market flows to stabilize. I am reminded of the recent Fed move on Aug 10. The stock market rallied that day from the announcement. The next day, it fell and continued to fall the days afterward. What was the market signaling about growth expectations from that event?
My take is that on Aug 10th, the stock market simply made a short term mistake that was quickly rectified.
5. September 2010 at 19:24
Of course the two sorts of beliefs in #5 are different, the latter sort pay rent.
Also, “murder” is what we choose to call the sorts of killing we consider wrong.
5. September 2010 at 21:06
Just a quick question about number 1.
Do you really think we’re any less statist than we were in the 1970s? I mean, I realize there was some significant amount of deregulation under Carter, but in terms of the number of areas of society the government has its hands on (in some way, shape, or form), it seems we’ve become MORE statist. Just a look at the growth of the Federal Register over the years should dispel any myths that we’re getting LESS statist.
But good list. Always enjoy your posts.
6. September 2010 at 01:24
“In the 1970s I thought the Nordic economic model was much more seriously flawed than it really is.”
Ah, but the Nordic economic model has changed significantly since the 1970s. Most importantly they’ve woken up to the economics of taxation. Tax consumption, then incomes, and only last try to get money out of companies and capital. There’s been quite a switch on this in the past 40 years.
6. September 2010 at 08:07
qq, You said;
“Moreover, BG and the others in that literature seem to want credit spreads to be about default risk, even though the finance literature finds that they’re driven almost purely by time-varying risk premia.”
This puzzles me. Are you saying the higher spreads on GM bonds, or Greek bonds, was not at all about default risk? I admit that I haven’t studied the issue, but why do bonds with almost no default risk (F&F, etc) have much lower spreads than they would have without those government guarantees?
MikeSandifer, Actually I was already fully invested in March 2009, so I can’t take credit. I meant I did not sell on Roubini’s advice. I did sell my pension stocks in late 2007 and reinvested in 2008, but I believe it was pure luck (and I still took substantial losses, as I got back in too soon.) But yes, I admit that I don’t practice what I preach. Life would be no fun that way.
My best bet was being 100% in Asian stocks during the 2003 -2007 bull market. I was betting on my belief that the neoliberalism trend in Asia is underrated by the market.
Mr. E, I know nothing about Chartalism. But if they believe that issuing government debt creates money, then I don’t plan to learn anything about it.
I don’t see the connection between March 2009 and Japan. In Japan they really did increase the monetary base with QE.
MikeSandifer, You said;
“It made me start thinking that maybe the dominant macro paradigms are flawed in some ways. I asked a question of Scott about whether the Fed can just buy US debt and retire it, but he correctly pointed to how naive, as in ignorant, that idea was.”
I don’t recall this. The government certainly can just buy debt and retire it, if it isn’t concerned about hyperinflation.
TravisA, You said;
“With any Fed easing, isn’t there a tension between how much the easing will affect growth vs credit conditions? Suppose that we had been in a typical tight monetary situation such as in 1982 and the Fed eases. We would expect bonds to rally, even though we expect growth to increase, correct? And the reason is that we expect the ease in credit conditions to outweigh the increase in growth, thus interest rates should fall.”
I don’t follow your reasoning. We know that something similar occurred on January 3 2001, when the Fed eased unexpectedly. Stocks soared and the price of long term T-bonds plunged by more than 2%. I’m not saying your scenario never happens, but it certainly isn’t necessarily the case. I could mention many other counterexamples.
You said;
“For the stock market, it’s an easier call. Growth expectation increased moderately and whether the credit ease component is greater or less than the growth expectations is less important.
Also, remember that the stock market bottomed on March 6. The British had announced a QE and the US stock market anticipated a Fed announcement coming relatively soon.
You have mentioned before (such as the 1987 crash) that you have to look at several markets in order to deduce growth expectations for the economy. I think this is also one of those cases.”
All three points are completely correct. I noted elsewhere that stocks and foreign exchange both rallied on the news. So other markets behaved as expected. I just can’t figure out the bond market.
TravisA#2, You said;
“Also, it might take several days for the market flows to stabilize. I am reminded of the recent Fed move on Aug 10. The stock market rallied that day from the announcement. The next day, it fell and continued to fall the days afterward. What was the market signaling about growth expectations from that event?
My take is that on Aug 10th, the stock market simply made a short term mistake that was quickly rectified.”
I’ve had the same thought, During the Great Depression, when policy news was complex and hard to interpret, the total reaction sometimes seemed different from the initial reaction. The August announcement did something, but the more you thought about it, the more pathetic it seemed. I know that doesn’t seem to fit in with EMH, but in complicated cases there may be second thoughts.
Perhaps markets were reacting to blogger pessimism about the announcement. 🙂
TGGP, He’s wrong. Moral predictions are just as accurate as many scientific predictions. The abolitionists made an implied prediction that eventually slavery would be viewed as wrong, and would be banned. And they were right. Moral beliefs make our society work better—they pay the rent.
Samuel, For the US you can argue either way. The various indices that I have seen that go back to 1980 (like the Fraser index of economic freedom) do show we are more free. But I was primarily thinking about the entire developed world, as that’s what I thought Olsen’s model was referring to. It has definitely become less statist since 1980.
Tim Worstall, That’s a very good point, and I was thinking about that when I made the list. But I still think I was wrong, as at the time I thought the high tax/GDP ratio meant socialism, and now I better understand that there is much more to socialism than the share of GDP flowing through the government.
6. September 2010 at 11:07
Scott,
“It made me start thinking that maybe the dominant macro paradigms are flawed in some ways. I asked a question of Scott about whether the Fed can just buy US debt and retire it, but he correctly pointed to how naive, as in ignorant, that idea was.”
In response, you offered “I don’t recall this. The government certainly can just buy debt and retire it, if it isn’t concerned about hyperinflation.”
I apologize, as I left out that part about me asking whether the Fed could then draw in inflation at the same time, to which you responded that it’d be an expensive way to retire the debt.
6. September 2010 at 11:31
Scott,
Chartalists don’t think money is created when the U.S. Treasury issues debt. You misunderstood what I wrote.
Money is created when the government deficit spends. Money is created when the government spends in excess of tax receipts.
Issuing treasuries impacts the price of term money, AKA the U.S. treasury yield curve. But the money was created when the government deficit spends. Two very, very different things – do not confuse them.
Spend a few days looking at Chartalism with an open mind, working through the simple math and thinking about real world banking and U.S. treasury operations. You will not regret it. Taxes destroy money, government spending creates money. Deficit spending is necessary to create net money.
Re: Japan. My point exactly – even after much aggressive QE, long term bond rates in Japan are really, really low. They didn’t go up. They had the aggressive QE that you wanted, and here we are a decade later with the 10yr JGBs under 1%.
6. September 2010 at 13:30
@Mr. E, Scott
Nick Rowe formulated a monetarist version of neo-Chartalism earlier this year.
At least in terms of policy recommendations, as Rowe points out, neo-Chartalism shares some similarities to vanilla monetarism; the differences lie in the underlying models of the real economy. Neo-chartalists are all endogenous money types, most reject NAIRU in favor of full employment, there is no money multiplier, etc.
6. September 2010 at 13:42
*whoops, actually last year.
6. September 2010 at 16:58
“Thus I was shocked to see long term rates fall sharply on the day of the March 2009 QE announcement.
I don’t have a good theory for why that happened. ”
Argh… Google 2009 dollar funding crisis. We’ve covered this.
Imagine a situation where mutual funds and money managers are liquidating everything to cover redemptions as retail investors go to cash. Likewise, margin investors are getting margin called because market price (MtM price) is too low, and their “instantaneous” net worth is too low. Money Managers know that stocks are massively undervalued, so at the margin they’d rather sell some bonds (which are less undervalued).
Supply dollars, and ALL assets go up simultaneously – bonds AND stocks. How often do you see bonds and stocks highly correlated across the globe? September 08 to March 09 was a big sucker punch to everyone who believed in global decoupling (Peter Schiff) and was shorting the dollar in carry trades (e.g. buying commodities like oil, buying foreign stocks, literally shorting dollar pairs, etc.).
Theoretically, in a dollar funding crisis, we should get someone trying to time-arbitrage the event, BUT to engage in multi-trillion dollar arbitrage, you need a funding source. And who was loaning money? (And who was borrowing?)
You’re worried the EMH is at risk here – I’m no EMH fan, but I don’t think the EMH is challenged here. You need to think of the market for dollars. Given the demand for dollars (which you could argue was due to a huge increase in perceived risk or a sudden awareness of poor asset quality underlying credit that led to fund redemptions) and shrinking supply, the market was adequately pricing stocks and bonds in terms of dollars.
Once the dollar funding crisis was eliminated, stocks and bonds resumed a somewhat inverse correlation.
Apparently, a positive correlation between stocks and bonds seems to be the evidence Bernanke needs to feel safe about QE (or whatever passes for QE).
6. September 2010 at 19:31
Scott, you said,
“I’m not saying your scenario never happens, but it certainly isn’t necessarily the case. I could mention many other counterexamples.”
That’s exactly my point. There are two forces working on the bond market: credit conditions and growth expectations which can result in possibly two different directions for bond prices to move when there is a Fed easing.
Let me see if I can make my reasoning clearer…
Why do you think that bond yields fell in 1982 when the Fed began to ease? What sort of model do you use to explain that, since growth expectations increased?
My intuition is that in 1980-1982 interest rates were forced by the Fed above the Walrasian equilibrium in order to push down inflation. The Fed’s easing signaled that interest rates would be allowed to fall to the Walrasian equilibrium. The increased expected economic growth can also raise the Walrasian equilibrium. But that increase was smaller than the difference between current rates and the new equilibrium. So overall, rates fell in 1982.
In other situations, interest rates could already be at the Walrasian equilibrium and then the Fed eases more. That would increase the equilibrium point and/or expected inflation and rates would rise, as in your example in Jan 2001.
7. September 2010 at 06:39
Mr. E, You said;
“Chartalists don’t think money is created when the U.S. Treasury issues debt. You misunderstood what I wrote.
Money is created when the government deficit spends. Money is created when the government spends in excess of tax receipts.”
I understood you perfectly, and I disagree.
You said;
“Issuing treasuries impacts the price of term money, AKA the U.S. treasury yield curve. But the money was created when the government deficit spends. Two very, very different things – do not confuse them.”
No, 1/P is the price of money. Interest rates are the opportunity cost of hold cash. Or the price of credit. But not money.
You said:
“Re: Japan. My point exactly – even after much aggressive QE, long term bond rates in Japan are really, really low. They didn’t go up. They had the aggressive QE that you wanted, and here we are a decade later with the 10yr JGBs”
No Japan didn’t do what I recommended. In 1993 I said that monetary injections intended to be temporary would not work. Japan made it very clear that they would pull the money out if inflation rose to 0%. It did rise in 2006 to 0%, and they reduced the monetary base 20%. That won’t stimulate.
In contrast, Japan has done massive deficit spending. How’s that working out?
David; Endogenous money and reject NAIRU? No thanks. They sound like Post-Keynesians.
Statsguy, But why then, after falling sharply, did bond yields almost immediately turn around and start rising sharply. I can think of lots of explanations inconsistent with the EMH, but not many consistent with the EMH. One that might be consistent with what you say is the following:
1. The annoucement caused yields to fall for reasons you indicated, which were only weakly related to monetary stimulus.
2. The later economic rebound was driven by Chinese growth, not QE, and hence wasn’t a lagged response to QE.
But that still leaves the sharp fall in the dollar after the QE announcement unexplained.
TravisA, You said;
“Why do you think that bond yields fell in 1982 when the Fed began to ease? What sort of model do you use to explain that, since growth expectations increased?”
Before I can answer this I’d need to know more about 1982, as I don’t recall the exact timing. But after looking at an old graph, I’ll try. My take is that the Fed actually didn’t ease much in 1982, rather the easing began late in the year and continued until mid-1984. And between late 1982 and mid-1984 10 year T-bond yields rose from about 8% to 12%.
The question is whether or not the Fed eased aggressively before late 1982. They certainly cut rates and increased the money supply, but as you know I don’t view those indicators as reliable. It’s been so long I can’t give you a good answer. I’d have to look at real time responses to Fed policy shocks, as I did in January 2001. So if you have that sort of data, then I could give you a more informed answer.
7. September 2010 at 09:13
#9 – my thoughts are here:
http://themoneydemand.blogspot.com/2010/09/scott-sumner-and-long-term-interest.html
7. September 2010 at 09:14
DeLong blogs #9:
http://delong.typepad.com/sdj/2010/09/scott-sumner-makes-a-mistake-monetary-economics.html
7. September 2010 at 11:15
Scott,
With respect to Mr. E, who said: “A very similar dynamic is happening in Japan. How can the country with one of the largest debt to GDP ratios in history have such low borrowing costs for so long?”
I was under the impression that disinflation/deflationary expectations accounted for this in a straightfarward way.
7. September 2010 at 11:21
Among Scott’s past errors: “I used to think I was smarter than other people who are just as intelligent as I am. Actually I sort of still believe this, but at least now one half of my brain knows how silly the opinion held by the other half of my brain really is.”
A certain naïve self-confidence is probably inseparable from thinking. Like Scott, we can try to keep this in bounds by engaging in a bit of ego-splitting, as follows. To form an opinion about p, set part of one’s brain–the epistemically lowest part–to work directly on the topic. Then have another part of the brain–a higher part–combine the opinion generated by the lower part with opinions gathered from as many other people as possible, and impartially synthesize all these data into a *higher* opinion about p. This puts the lower part of one’s brain in its place–it gets no more credence than any other person. Unfortunately, we are still putting implicit trust in the operations of our own higher part. Another difficulty: the higher part should be comparing its lowest-level counterpart’s opinion with the *lowest-level* opinions of other people; but it’s hard to get data on these. After all, most of what people believe is strongly influenced by what they think other people believe. In other words, most of everyone’s beliefs are already *higher-level*, and thus not suitable for amalgamation with one’s own *lowest-level* “belief.”
I fear that we are stuck with naïve self-confidence, at least at some level.
7. September 2010 at 13:05
“Endogenous money and reject NAIRU? No thanks. They sound like Post-Keynesians.”
============
I thought neo-chartalists ARE Post-Keys?
It’s getting harder to classify economists. I thought MMT, neo-chartalism, and Post-Keynesianism were all one and the same.
7. September 2010 at 14:01
Scott,
Here’s a 30 year T-bond futures chart from 1982:
http://tfc-charts.w2d.com/historical/TR/1982/0/continuous.html
Here’s the SP500 future contract from 1982:
http://tfc-charts.w2d.com/historical/SP/1982/0/continuous.html
Here’s the cash SP500 data from july to august 1982:
http://finance.yahoo.com/q/hp?s=^GSPC&a=06&b=3&c=1982&d=07&e=31&f=1982&g=d
Here’s the discount rate data:
http://www.ny.frb.org/markets/statistics/dlyrates/fedrate.html
Here’s a calendar from 1982 for help in counting the days on the bond chart:
http://www.hf.rim.or.jp/~kaji/cal/cal.cgi?1982
Here’s a NYT free preview article from Aug 14 talking about the discount rate cut the day before, after the market had closed:
http://www.nytimes.com/1982/08/14/business/dow-rises-by-11.13-on-rate-hopes.html?scp=3&sq=discount+rate&st=nyt
Here’s a NYT article talking about trading on Mon, Aug 16 for the credit markets (Published on Tuesday, Aug 17)
http://www.nytimes.com/1982/08/17/business/commodities-financial-futures-gain-despite-much-selling.html?scp=5&sq=discount+rate&st=nyt
Here’s a NYT article talking about the stock market (Published on Tuesday, Aug 17):
http://www.nytimes.com/1982/08/17/business/dow-advances-4.38-to-792.43.html?scp=4&sq=stock+market&st=nyt
You’ll see that on Aug 13, the stock market and the bond markets had rallied in anticipation of a discount rate cut. When the cut arrived, the stock and bond markets rallied early in the day on Monday, Aug 16 and then sold off a little to close a bit higher. The next day and months, both continued to rally.
7. September 2010 at 17:00
“The abolitionists made an implied prediction that eventually slavery would be viewed as wrong, and would be banned.”
No, the abolitionist belief that slavery was wrong was not a disguised prediction about what would happen in the future. Their beliefs were not contingent on the actions of others. If a time-traveler had shown William Lloyd Garrison that future generations shared Calhoun’s conception of slavery, it would not have made a dent in his beliefs. Plus, in your view the belief that people in the future would consider it wrong is thus actually a belief that people in the future will have about people in the future ad infinitum! Similarly, if you had told Ben Jonson that Shakespeare would be considered the greatest talent of his age he would not retract any of his reviews, nor would his contemporaries expect him to. These topics are inherently subjective, involving functions taking two values, not one.
8. September 2010 at 08:35
@Dustin
Apparently some of them are, like Marc Lavoie. But it seems that many post-Keynesians and neo-Chartalists do not explicitly espouse each other’s labels. I expect they are all weary about their earlier semantic battles.
MMT seems acknowledged to be a synonym for neo-Chartalism, though.
8. September 2010 at 16:06
123, First you say capital wasn’t available for risk arbitrage, and then you said markets made a mistake. It seems to me that those are two different assertions. What would have prevented me from selling bonds short right after the March 9 QE announcement?
I’m not saying you are wrong, the bond price movements certainly looked suspicious.
I left a comment at DeLong’s site, I think he missed the point that all sorts of other markets reacted as if the stimulus was effective.
Mike, I agree.
Philo, I think we are stuck toggling back and forth, just as we do about whether our lives are happy, and all sorts of other moods. We’re stuck being overconfident most days, and then once and a while realizing that we aren’t anything special, and there’s no reason for us to be so confident.
Dustin, You may be right, I don’t follow that stuff–life’s too short.
Travis, Thanks for doing all that work. What strikes me about the data is that money was really tight throughout 1982 if you look at nominal interest rates compared to NGDP growth (which was extremely low) or real GDP levels, which were also very low.
Bond yields seemed to reach a low around early October, which is about when money arguably finally got noticeably easier.
But I don’t disagree with your assertion about the market response in June, you are probably right.
TGGP, I disagree about morals and aesthetics. I think these judgements are implied predictions, even if only subconciously. If one lonely critic champions some artist, and then decades later that artist is universally viewed as great, then I think the critic feels that this shows he or she was right, “he’s stood the test of time.” Time tests art (and morals) just as a chemist tests chemicals.
9. September 2010 at 00:10
“First you say capital wasn’t available for risk arbitrage, and then you said markets made a mistake. It seems to me that those are two different assertions. What would have prevented me from selling bonds short right after the March 9 QE announcement?”
Noise trader risk is a main enemy of arbitrage. And in March 2009 arbitrage capital was very scarce, and yet there was an announcement that bureaucrats will intervene on a massive scale – noise trading par excellence. Noise traders won and markets made a mistake.
“I left a comment at DeLong’s site, I think he missed the point that all sorts of other markets reacted as if the stimulus was effective.”
Yes, other markets reacted correctly, but there was no risk that the Fed will trade in the wrong direction in those markets.
9. September 2010 at 07:09
123, You certainly might be right. I don’t suppose Treasury futures would provide any additional information? Normally the answer is no, but as you noted some of the normal arbitrage between bonds broke down at that time. So maybe futures showed expectations of more rapidly rising short rates.
10. September 2010 at 02:37
Scott, the bond rally immediately after QE announcement was so steep I’m sure futures rallied too. There might have been some subtle differences in market action that might clarify some details and might help us pinpoint the sources of increased demand, but I have no access to such data.
I’m amazed how frequently the prospect of additional QE is mentioned as a positive factor for 10y bond these days. Let’s hope Kocherlakota doesn’t notice, or he might come to a conclusion that QE will increase the risk of deflationary trap 🙂
10. September 2010 at 18:36
123, Regarding your last point, what worries me is a possible “circularity problem:
1. The markets expect QE, and things keep moving forward gradually as inflation expectations stay positive.
2. The Fed sees things moving forward and markets doing OK, decides no QE is needed.
3. The markets then fall back on disappontemnt over lack of QE, and we slide into double dip/deflation.
Not predicting it, but it’s possible.
11. September 2010 at 08:25
4. In the 1970s I thought the Nordic economic model was much more seriously flawed than it really is.
It was, the Nordic model anno 1970-1990 was and still is seriously flawed i.e. functional socialism. The model created in the late 80s and implemented 1993 during the Swedish banking crisis i.e. a neo-liberal/freidmanite economic and public policy programs:
* large scale privatizations
* massive deregulation
* school vouchers
* cutting marginal tax rates by 1/3
* Cutting corporate taxes to 21 %
* flattening the tax system and abolsihing nearly all deductions
* abolishing wealth and inheritance taxes
* capping property taxes
* taking the political system out of economic policy making and instead putting in automatic control mechanisms
* fully funding and privatizing part of the social security
*increasing flexibility in the labor market
* slimming and trimming the Public Sector capping Public Sector pay increases to private sector increases but also never allowing Public Sector average pay becoming higher than 80 % of the average Private Sector pay.(Not a government mandate but an informal agreement between Public and Private sector unions supported by government and the Confederation of private sector employers.)
This created the created the Nordic model of today, the envy of the world, not the functional socialism of the 70s and 80s. US intellectuals seems totally to miss this massive shift in Nordic polices. Maybe its because the rhetoric is still very much left but the practice is in fact nearly 100 % free market oriented.
11. September 2010 at 08:36
Old Whig, Very good comment. I am actually more aware of those trends than you think, although I appreciate your list, as you know much more than I do. I did a post called The Great Danes last year, that you can google if interesting.
But I’m not willing to let myself off the hook so easily. In the 1970s I had only a rudimentary understanding of those issues, I thought a high government spending to GDP ratio was what socialism was all about. Now I have a much more sophisticated understanding of these issues. Peter Lindert has talked about how the Nordic countries can maintain a high tax level, as a share of GDP, precisely because they are relatively efficient in economic policymaking.
11. September 2010 at 12:03
Scott, circularity problem is a risk if leading indicators deteriorate further.
12. September 2010 at 06:10
123, I agree.
15. September 2010 at 05:38
@Scott Sumner,
Yes, you are absolutely correct. However the Nordic model can only be implemented where certain other factor co-exist. To try to emulate it is in my opinion very, very difficult.
1. A pragmatic and scientific approach to policy making with political consensus when fundamental changes has to occur. changes
2. A nearly non-corrupt government bureaucracy
3. A small and very culturally homogeneous population sharing very narrow and similar values
I was born in Sweden in the late 50’s and have seen all the changes and lived through them. The post war prosperity, the disastrous years between 1968-1993, the comeback after 1993.
I moved to the US 2011 and am now very concerned that the US seems set to make the same policy mistakes we did in the 70-80s that almost destroyed our economy. The remedy in the 90’s put Sweden on life support but couldn’t cure the underlying problems, they were too severe. The malaise you saw in the 70’s was in fact as real as you think.
The lesson nobody seems to understand is what you are writing that the Nordic countries are efficient in public policy making it is twofold. It’s about the efficiency in the implementation through the bureaucracy. The Nordic Model wouldn’t wok if both where not in place. Nordic countries are interested in results not good intentions.
The tradition of the non corrupt bureaucracy is about 500 years long. Sweden is one of the most centrally governed countries in the world. The King Gustaf Wasa in the early 16th century understood that he if he was centralizing power needed a bureaucracy only loyal to him as well as non-corrupt. He instituted large scale programs to educate and recruit the ablest of the people, even from among common men. He also instituted draconian punishment for those that served other interest than the Crowns i.e. special interest groups. This is still in place and any Swedish politician that interferes directly into the bureaucracy is deposed an shunned by the rest of the political community. Even though Sweden have strong labor laws a bureaucrat found out to give special favors or work for special interest is immediately terminated. How deep ingrained this ethic is in Swedish civil servants can be deduced from how Swedish universities promote it. In every course I took at law school started with the professors telling us in essence: “Remember that you cannot be biased and remember that you have to be neutral, you cannot accept any favors not even from close friends and relatives”
This of course does not mean that all Swedish government bureaucrat are pure as driven snow but every time even a hint of bribery or special favors being asked a little red flag appears in your consciousness. It will not deter all but most.
That is why an expansion according to the Nordic Model of 50 % tax increases and a doubling of the Public Sector cannot take place in the US. It nearly killed the Nordic model. If the US bureaucracy was as efficient and non-corrupt it would not work because the US is plus 300 mn. The biggest concern however is that the US government bureaucracies is in fact completely and utterly corrupt, extremely inefficient. It is built into the system because bureaucrats are politically chosen and politicians are allowed to interfere, political cronyism and favoritism is rampant. Pork spending et al.
A recent study by worldwide CEO when asking about the problems of doing business in the US was close to the top the extremely inefficient bureaucracy, 12 % answered this. The US had in the rankings in business friendliness overall fallen to 4th place after Switzerland, Singapore and Sweden. All three counties have extremely non-corrupt and efficient bureaucracies.
16. September 2010 at 05:10
Old Whig, I completely agree with everything you say, and appreciate all that info. I learned quite a bit. I couldn’t help thinking of my home state of Wisconsin, which is not a un-corrupt as Sweden, but is much less corrupt than my current state (Massachusetts). This is partly due to the fact that many Nordic immigrants moved to Wisconsin. I’m 1/8 Swedish and 1/8 Norwegian by descent.
So I guess that makes me 25% as honest as the average Nordic person. (Just kidding folks.)