Escaping from the Friedman Paradigm | New Economic PerspectivesNew Economic. By Dan Kervick Paul Krugman made a remarkable assertion last week about the dwindling legacy of Milton Friedman: … Friedman has vanished from the policy scene — so much so that I suspect that a few decades from now, historians of economic thought will regard him as little more than an extended footnote. Krugman’s efforts to deliver a disparaging judgment on the Friedman legacy in macroeconomics may be appreciated, but I’m not sure his critique digs very deep. Friedman was not just a macroeconomist; he was also an important figure in the history of American political thought who left a deep conservative impact on the minds and attitudes of people whose intellectual development occurred during the Friedman heyday. Consequently, Friedman helped define the boundaries of the rigid neoliberalism that still seems to reign supreme among US politicians of both parties, and among elite opinion-makers in the ranks of the professional economists and technocrats.
Let’s begin with the macroeconomics. © Reuters. Outgoing US Federal Reserve Board chairman Bernanke appears at Brookings Institution in Washington (Reuters) - Ben Bernanke, former chairman of the U.S. Federal Reserve, has agreed to become a senior adviser to Citadel Investment Group, a $25 billion hedge fund founded by billionaire investor Kenneth Griffin, the New York Times reported on Thursday. Bernanke, who handed the reins of the U.S. central bank to Janet Yellen last year, will advise Citadel's investment committees on global economic and financial issues and meet the fund's investors, the newspaper said. ( Reuters was not immediately able to reach Citadel or Bernanke for comment outside regular U.S. business hours.
Big-name hedge funds are making a habit of hiring former central bankers and other government officials as their funds grow in size and scope. Bernanke's predecessor, Alan Greenspan, joined hedge fund Paulson & Co as adviser in 2008. Either I manage to stay on most people's good sides, or most people just don't care about me that much, but for whatever reason, Noah smackdown attempts are rare. But today, J. Bradford DeLong has delivered a smackdown on Yours Truly. Last year I wrote a qualified defense regarding John Cochrane's warning of inflation, saying that basically, well, these things are hard to call. If there's a 1% chance of a catastrophic hyperinflation and a 99% chance of a continued economic stagnation, is it right to say that inflation is "the danger"? Brad says no: Naughty, naughty Noah!... When you say something is "the danger", you are saying that other things are not dangers.
And if other things are in fact dangers? You can plead hyperbole--that you did not mean that this was really the only danger but that it was the only significant danger, or the only truly worrisome danger, and that it was the only worrisome or significant danger. But how about Cochrane's beliefs, and terminology? Several commenters asked me why the liquidity trap hypothesis implies that countries are unable to devalue their currencies in the forex markets. There are several ways of answering this. A liquidity trap implies the central bank cannot inflate, but currency devaluation tends to raise the price level.
But that doesn’t really answer the question. It seems obvious that countries can devalue, why do the Keynesians think this becomes impossible at the zero bound? Here’s why people are confused. Think about the common reply to liquidity trap worries; “The central bank could buy all the assets on planet Earth–surely that would depreciate the currency!” 1. 2. Those objections then become the real reason for monetary policy ineffectiveness, not the zero bound. Now that we understand that the real problem is not enough eligible assets, or unwillingness to expand the balance sheet, it becomes clear why some countries (in their view) cannot devalue. PS. Tags: I See Very Serious Dead People - NYTimes.com. In the long run, of course, when we’re all dead. I’m scrambling on last-minute course prep, so not much blogging today. But yesterday’s Steve Rattner article, misuse of labor cost data aside, had me thinking about an issue that has had me annoyed ever since this crisis began: the constant efforts on the part of Very Serious People to turn discussions away from monetary and fiscal policy, recessions and sluggish recoveries, to the supposedly more fundamental issues of structural reform and long-term growth.
Rattner dismisses the austerity/stimulus debate as “simplistic”; Jeff Sachs calls Keynesian concerns “crude”; many, many people (I’d guess an especially large fraction of those at Davos) are eager to get away from all this deflation stuff and talk about how what they imagine to be, or wish were, the really important issues like Big Data and a world that’s even flatter.
So, a few points. But this long run is a misleading guide to current affairs. Microsoft PowerPoint - PikettyZucman2012Slides.ppt - PikettyZucman2012Slide. Journal Articles | Jeffry Frieden. Strip private banks of their power to create money - FT.com. Scott Sumner Busts Krugman. 31 Jan 2015 Scott Sumner has been lighting it up at EconLog in his running commentary against Keynesians, notably Paul Krugman. (The two most recent examples are here and here, but it goes back further.) Scott’s running theme here is that guys like Krugman picked the U.S. austerity episode as the hill to die on, and then when they died, they not only didn’t see the problem, but instead ran around bragging about how awesome their model had performed! Scott has made an analogy (one I made in the past, as well) with the Keynesian debacle over the Obama stimulus package, where the economy did worse *with* the stimulus than the Keynesians were warning would happen *without* the stimulus.
Regarding the sequester, the opposite happened: The economy did better *with* the “austerity” than they predicted would happen *without* spending cuts and tax hikes. Summarizing his latest post, Scott writes: “Two grand Keynesian experiments and two abject failures. I love it! Noahpinion: Nuclear will die. Solar will live. In a recent article, I suggested that batteries might replace oil for many of our transportation needs within two decades. Batteries store energy, and we need a way to produce that energy in the form of electricity. Currently we produce most of our electricity from natural gas and coal. And while our use of natural gas and coal doesn’t feed the coffers of unsavory regimes like Russia and Saudi Arabia the way our use of oil does, it’s still the case that these energy sources are limited.
They run out. What will replace them? The leading candidate is solar power. But there is still a strong contingent out there who is dead-set against the solar revolution – not because they want to keep using fossil fuels, but because they are convinced that only nuclear power can solve our energy crunch. One example of this faction is the Breakthrough Institute, which regularly releases articles comparing nuclear and solar, invariably supporting the former over the latter. First, cost. Oops. Noahpinion: R vs. g. In his new book, Thomas Piketty argues that R, the rate of return on capital (which is different than the safe interest rate "r") is greater than g, the rate of economic growth, and that this fact can be expected to continue into the indefinite future, resulting in an ever-rising capital share of income and an ever-falling labor share. The big question is whether R really will be greater than g into the foreseeable future. The "robots" argument basically says: "Labor" is just the flow income from renting out one specific type of capital, i.e. human capital.
If technology continues to make more and more obsolete, then the value of human capital will fall as a percentage of total capital, and thus labor's share of income will continue to fall toward zero. That's the scenario I considered in this Atlantic article a while back. This thesis is supported by the research of Loukas Karabarbounis and Brent Neiman, and is often labeled the "rise of the robots" in econ blog discussions.
Noahpinion: The Great Labor Dump. One of my favorite teachers at Michigan was a self-effacing but brilliant labor economist named Mike Elsby. Mike has sadly decamped for Scotland, but he continues to turn out excellent papers. One of his latest, a Brookings conference paper, takes on a hugely important question that has been on everyone's minds of late: Why has labor's share of income declined in advanced countries? There are basically three competing stories. These are: 1. Robots. Technology has made it cheap to replace humans with automation, driving profits up and wages down. 2. 3. Mike Elsby and his coauthors find support mostly for story #3. U.S. data provide limited support for...explanations based on the substitution of capital for (unskilled) labor to exploit technical change embodied in new capital goods...
This finding disagrees with some other recent papers, such as Karabarbounis and Neiman (2013), who support the "robots" story. Anyway, this is an important piece of research that everyone should know about. TheMoneyIllusion » Krugman vs. Smith. Noah Smith recently did a post discussing the long period of deflation in Japan, and noted that NK models generally predict that wages and prices should eventually adjust to restore full employment.
Paul Krugman criticized Smith as follows: No, the only reason deflation “works” in the standard model is that it increases the real money supply, which leads to lower interest rates; in effect, it acts like an expansionary monetary policy.But Japan has been in a liquidity trap during the whole period Smith looks at. Monetary expansion is ineffective unless it can raise expectations of future inflation. Deflation is definitely not going to help. Hmmm, which hippie to punch? Long time readers know I strongly disagree with Krugman’s view, as I think the standard model uses inflation where NGDP growth is needed. Now I suppose you could argue that falling wages would cause the central bank to reduce NGDP. But what about Krugman’s employment claim? Japan: 4.1% and falling Greece: 26.9% and rising. A New Macroeconomic Strategy by Jeffrey D. Sachs. NEW YORK – I am a macroeconomist, but I dissent from the profession’s two leading camps in the United States: the neo-Keynesians, who focus on boosting aggregate demand, and the supply-siders, who focus on cutting taxes.
Both schools have tried and failed to overcome the high-income economies’ persistently weak performance in recent years. It is time for a new strategy, one based on sustainable, investment-led growth. The core challenge of macroeconomics is to allocate society’s resources to their best use. Workers who choose to work should find jobs; factories should deploy their capital efficiently; and the part of income that is saved rather than consumed should be invested to improve future wellbeing. It is on this third challenge that both neo-Keynesians and supply-siders have dropped the ball. Most high-income countries – the US, most of Europe, and Japan – are failing to invest adequately or wisely toward future best uses. In the US, public investment spending has been slashed.
No, really. Business Insider contacted him about his 2009 warning that soaring inflation and interest rates were just around the corner — and he not only admits that he was wrong, he admits that his error signified something wrong with his overall economic model: “Usually when you find the model this far off, you’ve probably got something wrong with the model, not that the world has changed,” he said. “Inflation does not appear to be monetary base driven,” he said. This is a remarkable act of intellectual honesty — remarkable because it happens so rarely. I do wonder exactly what model Laffer was using. As I pointed out again and again, basic IS-LM analysis said that even huge increases in the monetary base aren’t inflationary in a liquidity trap; and yes, I was making that prediction in advance.
From where I sit, our models have worked just fine. The Economic Consequences of Mr. Rajoy - NYTimes.com. A Permanent Slump? - NYTimes.com. But what if the world we’ve been living in for the past five years is the new normal? What if depression-like conditions are on track to persist, not for another year or two, but for decades? You might imagine that speculations along these lines are the province of a radical fringe. And they are indeed radical; but fringe, not so much. A number of economists have been flirting with such thoughts for a while. And now they’ve moved into the mainstream. In fact, the case for “secular stagnation” — a persistent state in which a depressed economy is the norm, with episodes of full employment few and far between — was made forcefully recently at the most ultrarespectable of venues, the I.M.F.’s big annual research conference.
And the person making that case was none other than Larry Summers. And if Mr. Mr. He then made a related point: Before the crisis we had a huge housing and debt bubble. Mr. I’d weigh in with some further evidence. Why might this be happening? But as Mr. Why We’re in a New Gilded Age by Paul Krugman | The New York Review of Book. Capital in the Twenty-First Century by Thomas Piketty, translated from the French by Arthur Goldhammer Belknap Press/Harvard University Press, 685 pp., $39.95 Thomas Piketty, professor at the Paris School of Economics, isn’t a household name, although that may change with the English-language publication of his magnificent, sweeping meditation on inequality, Capital in the Twenty-First Century.
Yet his influence runs deep. The result has been a revolution in our understanding of long-term trends in inequality. It therefore came as a revelation when Piketty and his colleagues showed that incomes of the now famous “one percent,” and of even narrower groups, are actually the big story in rising inequality. Still, today’s economic elite is very different from that of the nineteenth century, isn’t it? It’s a remarkable claim—and precisely because it’s so remarkable, it needs to be examined carefully and critically. What do we know about economic inequality, and about when do we know it? Why? The Piketty Panic - NYTimes.com.
“Capital in the Twenty-First Century,” the new book by the French economist Thomas Piketty, is a bona fide phenomenon. Other books on economics have been best sellers, but Mr. Piketty’s contribution is serious, discourse-changing scholarship in a way most best sellers aren’t. And conservatives are terrified. Thus James Pethokoukis of the American Enterprise Institute warns in National Review that Mr. Piketty’s work must be refuted, because otherwise it “will spread among the clerisy and reshape the political economic landscape on which all future policy battles will be waged.” Well, good luck with that. I’ll come back to the name-calling in a moment. Mr. No, what’s really new about “Capital” is the way it demolishes that most cherished of conservative myths, the insistence that we’re living in a meritocracy in which great wealth is earned and deserved. But how do you make that defense if the rich derive much of their income not from the work they do but from the assets they own?
James Buchanan (1919-2013), Appreciations. The Economist explains: Thomas Piketty’s “Capital”, summarised in four para. World Thinkers 2015: Jeremy Rifkin.