links for 2009-01-10

• Is the Implementation Lag for Infrastructure Investment a Problem? - Econbrowser
• Why stabilisation policy should focus on the poor - voxeu.otg
• Andrew Mellon vs Bailout Nation - Bill Gross
• The Fiscal Stimulus: What Will Work? - Bruce Bartlett
• Debt and Wealth - Nick Rowe
• U.S. Monetary Policy Objectives in the Short and Long Run - FRBSF

Comments

[Mezzanine]

Infrastructure development and repair sounds good on paper, but what are you going to fund it with? More fiat currency which will just drive up inflation? No, either you blow up the current "free market" and say we're now a 100% socialist state where everyone gets their assigned job and hovel. You know "each according to his needs, rather then wants". AT least admit you don't believe in the viability of a society where everyone pursues their own interests.

[anne]

"No, either you blow up the current 'free market' and say we're now a 100% socialist state where everyone gets their assigned job and hovel. You know 'each according to his needs, rather then wants.' "

Notice and understand the language of viciousness.

[bob mcmanus]

I read the Nick Rowe piece on his site. I found it interesting, but it is part of what I am currently interested in. Savings. Overlapping generations. Liquidity preference. One of the books I have open uses the "social structure of a capitalist economy." Not really Marxian, just labour savings and capital savings in time.

The piece DeLong posted yesterday bothered me, asset devaluations and risk management. Seemed exogenous, and written in a language and model I couldn't relate to or criticize.

[Beezer]

The Voxeu article on social safety nets is spot on for every country, including ours. Productivity increases alone would cover what we spend.

[Beezer]

No need to blow up capitalism. It does a nice job of doing that to itself on a fairly regular basis.

What is needed is informed and tough regulation. That way, we can benefit from capitalism while protecting ourselves (can't protect completely as free markets are very creative at destruction)from the occasional bombing.

At least terrorists know they're going to blow up. Capitalists build, strap on, and detonate their bombs without even knowing it. And, of course, they are totally surprised when they blow up.

[Beezer]

Here's an idea. The government will take care of the unemployed and poor, including health care.

And the private market can take care of itself.

[anne]

http://www.nytimes.com/2009/01/11/world/middleeast/11mideast.html

January 11, 2009

As Talks Falter, Israel Warns Gazans of More Extensive Attacks
By ETHAN BRONNER

Israel warned Gazans on Saturday that it was preparing the next phase of its war against Hamas.

[anne]

Madness, the war on Gaza is madness, but neither George Bush nor Barack Obama nor Congress will ask, simply ask, for a ceasefire. Bush prevented America from voting for a ceasefire at the United Nations, the only nation in the Security Council not to ask for a ceasefire. Obama can send Joe Biden to Pakistan to press on American war efforts, but claims to be unable to ask for a ceasefire in hopes of lessening the tragedy of Gaza.

[bob mcmanus]

I don't know if this has been linked yet. The link looks like the Transition Office

Romer & Bernstein released at 6 AM a paper "The Job Impact of the American Recovery... Plan"

I got my link via the WSJ, which charts the jobs by sector; Krugman is going over the projections this morning

[anne]

http://krugman.blogs.nytimes.com/2009/01/10/romer-and-bernstein-on-stimulus/

January 10, 2009

Romer and Bernstein on Stimulus
By Paul Krugman

[Figure] Is this enough?

OK, Christina Romer and Jared Bernstein have put out the official (?) Obama estimates of what the (American Association of Retired Persons) American Recovery and Reinvestment Plan would accomplish. The figure above summarizes the key result.

Kudos, by the way, to the administration-in-waiting for providing this — it will be a joy to argue policy with an administration that provides comprehensible, honest reports, not case studies in how to lie with statistics.

That said, the report is written in such a way as to make it hard to figure out exactly what's in the plan. This also makes it hard to evaluate the reasonableness of the assumed multipliers. But here's the thing: the estimates appear to be very close to what I've been getting.

The key thing if you want to do comparisons is to note that I made estimates of the average effect over 2009-2010, while they do estimates of effect in the fourth quarter of 2010, which is roughly when the plan is estimated to have its maximum effect. So they say the plan would lower unemployment by about 2 percentage points, I said 1.7, * but their estimate may actually be a bit more pessimistic than mine. They have the plan raising GDP by 3.7 percent, but that's at peak; I thought ** 2.5 percent or so average over 2 years, again not much difference.

So this looks like an estimate from the Obama team itself saying — as best as I can figure it out — that the plan would close only around a third of the output gap over the next two years.

One more point: the estimate of what would happen to the economy in the absence of a stimulus plan seems kind of optimistic. The chart above has unemployment ex-stimulus peaking at 9 percent in the first quarter of 2010 and coming down through the year; the CBO estimates *** an average unemployment rate of 9 percent for 2010, so the Obama people are more optimistic than the CBO, and a lot more optimistic than I am.

Bottom line: even if I use the Romer-Bernstein estimates instead of my own — there really isn't much difference — this plan looks too weak.

* http://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithmetic-wonkish-but-important/

** http://www.nytimes.com/2009/01/09/opinion/09krugman.html

*** http://www.cbo.gov/ftpdocs/99xx/doc9957/01-07-Outlook.pdf

[anne]

http://krugman.blogs.nytimes.com/2009/01/10/risks-of-deflation-wonkish-but-important/

January 10, 2009

Risks of Deflation (Wonkish But Important)
By Paul Krugman

Feeling a bit deflated [Chart]

There's been some talk abut risks of deflation, but there's one alarming comparison I haven't seen made. The figure above shows that the CBO is currently projecting an output shortfall from the current slump comparable to the slump of the early 1980s. Actually, it's very close: if you compare the CBO's projections of unemployment * from 2008 through 2012 with its estimate of the natural rate, we're looking at cumulative excess unemployment of 13.9 point-years; that compares with 13.7 point years from 1980 through 1986. (If the natural rate — the unemployment rate that keeps inflation unchanged — is 5 percent, and the actual unemployment rate averages 7 percent over a year, that's 2 point-years of excess unemployment.)

Now here's the thing: the slump of the early 1980s produced the Great Disinflation, which brought the core inflation rate down from about 10 to about 4.

This time, however, we entered the slump with a core inflation rate of about 2.5 percent. If we experienced a disinflation comparable to that of the 1980s, that would mean ending up with deflation at a rate of -3.5 percent.

And bear in mind that neither the CBO nor the Obama team ** really explains where recovery comes from; it's just assumed.

So tell me why we aren't looking at a very large risk of getting into a deflationary trap, in which falling prices make consumers and businesses even less willing to spend. Tell me why this risk wouldn't remain high, though lower, even with the Obama plan, which as far as I can tell is expected to reduce cumulative excess unemployment by about a third.

* http://www.cbo.gov/ftpdocs/99xx/doc9958/01-08-Outlook_Testimony.pdf

** http://krugman.blogs.nytimes.com/2009/01/10/romer-and-bernstein-on-stimulus/

[bob mcmanus]

"Our analysis assumes that households treat the tax cut as
permanent in determining their short-run spending." ...Romer & Bernstein, above

So what, is this a Ricardian equivalence model? I noticed in the appendix 1 that the multiplier for the tax cuts starts at zero and ends at one;the multiplier for the spending starts at one in the first quarter, climbs to 1.57 and then starts to decline slightly.

Have there been studies of Ricardian effects on multipliers of gov't spending programs? I am currently very interested in whether longer term gov't projects would be more stimulative.

[bob mcmanus]

"We considered multipliers for the case where the federal funds rate remains constant, rather than the usual case where the Federal Reserve raises the funds rate in response to fiscal expansion, on the grounds that the funds rate is likely to be at or near its lower bound of zero for the foreseeable future." ...Romer & Bernstein

Okaaay.

[anne]

http://www.nytimes.com/2009/01/11/world/asia/11afghan.html?ref=world

January 11. 2009

Biden Arrives in Afghanistan to Discuss War
By DEXTER FILKINS

Vice President-elect Joseph R. Biden Jr. and Senator Lindsey Graham the top commander in Afghanistan and the American ambassador.

[There we have the Obama doctrine, war in Afghanistan is fine, indefinitely fine, and can be openly discussed and planned for months before being elected President and openly discussed and planned for after being elected but before taking office, but simply asking for a ceasefire in Gaza is not permissible.]

[Bruce Wilder]

I read the Nick Rowe piece, and despaired. The real gain from having a financial system capable of mediating debt comes from the capacity it creates to make deals across time. Wealth is the expectation of future financial income flows and corresponding flows of future production and consumption.

If someone borrows $100 and spends it now on consumption, with or without intending to pay it back, there's no wealth created -- there's just a transfer of current consumption, with -- maybe -- a corresponding expectation of a similar transfer of then-current consumption in the future. That's not very interesting, economically; it might be tragic -- indeed, it might be so tragic as to justify a religious prohibition on usury. But, it's not wealth.

What is economically interesting is the capacity to invest, that is, to marshal resources now in some project that does not contribute in any way to current production for current consumption, but which does alter current expectations about future production for future consumption.

In a world of no tomorrow, wealth would simply be all those claims on current income (= current consumption = current production) that flow to resources other than raw, unskilled labor. In a world with a stable financial future, we can add to the wealth of current claims, the wealth of future claims, new and continuing. This future is maya, illusion -- a dreamland, that serves to disguise the reality that we are not maximizing current consumption -- some income flows to draw resources into (currently) unproductive activity, which, nevertheless, enhances and expands future productive capacity and expectations of future income and consumption possibilities.

Money and the financial system conjure this critically important maya, which allows a complex economy of highly specialized and interdependent actors to cooperate and progress. Resources, including lots of talented people, can be devoted to projects that do not add anything to current consumption, without anyone feeling deprived of current consumption; indeed, a boom, when the proportion of resources diverted to investment (which is production not available for current consumption) is highest, feels exceedingly prosperous and hopeful.

But, a financial system is very much a mechanism for displaying a virtual reality, and akin in its conjuring illusion, to a magic show. And, like any magic show, it must be carefully stage-managed to work well, with lighting and scenery and viewing angles and all the tools of narrative stage-craft in the management of perceptions deployed to keep the audience participating faithfully within the framework and terms of the illusion.

The terms of the financial system's illusion are, of course money terms: prices and the value of nominal currency as a claim on resources and current production.

Liquidity trap and deflationary economics are uninspiring terms for a circumstance in which the curtain has drawn back, the key actors have forgotten their lines, scenery is crashing to the stage, the houselights have come on, and the stagelights have gone out. All that's left is for someone to cry, "Fire!" -- but such drama is not necessary -- the theatre is not functioning. The Matrix is laid bare, and that alone engenders panic and confusion.

Lots of people want the show to go on, to resume, even if much of the potential, participating audience is left outside begging in the cold, bare street. Worrying about the moral implications of debt in these circumstances is insisting on the values and levers and scoreboard of the virtual reality, of the Matrix, while ignoring the revealed dysfunction of the theater's mechanical systems -- the skeleton of ropes and pulleys and backstage corridors and army of stagehands and ushers.

[anne]

http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/01/the-burden-of-the-debt-is-always-the-opposite-of-what-people-think-it-is.html

January 9, 2009

Debt and Wealth
By Nick rowe

"It's easy to keep your head clear on whether or not government debt is a burden. If current taxpayers think it is a burden, and so take offsetting action, then it isn't a burden. If current taxpayers don't think it is a burden, and so don't take any offsetting action, then it is a burden. The true answer is always the opposite of whatever people think is the true answer. Clear?"

[A sample of the nonsense, but reminding me never to worry about government debt. Clear?]

[anne]

I am, by the way, reminded that Canada has evidently ceased pretending to be a democracy for the time while conservatives figure out exactly how to keep control permanently and revert back then to the appearance. Actually, after Queen Elizabeth's Governor General shut down the Canadian parliament for the conservatives, I am wondering whether Canada is even independent or ever ceased being a monarchy.

[anne]

http://www.nytimes.com/2009/01/11/washington/11iran.html

January 11, 2009

U.S. Rejected Aid for Israeli Raid on Iranian Nuclear Site
By DAVID E. SANGER

President Bush deflected a request by Israel last year for help in an attack on Iran’s main nuclear site and told the Israelis about new covert action against Iran.

[OMG!]

[Nick Rowe]

anne: Canada never ceased being a (constitutional) monarchy. Queen Elizabeth is Queen of Canada, and our head of state. http://www.gg.ca/gg/rr/index_e.asp

Bruce: I don't think we disagree (up till your fourth paragraph, where you lost me). That's why I said that real aggregate wealth (in a closed economy) is the value of the real (non-financial) assets, like capital. The way to increase aggregate wealth is via investment, to increase the stock of capital (and hence future output and consumption). That's why I discussed whether changes in debt would be correlated with changes in investment. Perhaps I wasn't clear enough.

[anne]

Nick Rowe:

"Canada never ceased being a (constitutional) monarchy. Queen Elizabeth is Queen of Canada, and our head of state."

http://ebooks.adelaide.edu.au/d/dickens/charles/d54tt/part1.html

1859

A Tale of Two Cities
By Charles Dickens

Recalled to Life

The Period

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way—in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

There were a king with a large jaw and a queen with a plain face, on the throne of England; there were a king with a large jaw and a queen with a fair face, on the throne of France. In both countries it was clearer than crystal to the lords of the State preserves of loaves and fishes, that things in general were settled for ever....

[anne]

Nick Rowe may write well, but as for the decadence which has puzzled me before, now I understand. Monarchist?

[Mezzanine]

Anne - your disproportionate attacks on Israel shows your rottenness and viciousness. Quire ghoulish if you ask me.

[Nick Rowe]

Thanks anne. Yep, you spotted it: not rabidly so, but nevertheless a monarchist!

[anne]

"---- your disproportionate attacks on Israel shows your rottenness and viciousness."

What on what shows what and what? Interesting, that asking for a ceasefire in Gaza is this or that or the other or is the problem the United Nations Security Council or New York Times editorials? Sort of like asking for an end to war in Iraq and Afghanistan and Somalia.

[bob mcmanus]

"Money and the financial system conjure this critically important maya"

Bruce, some people are trying to do math here, or at least build models. Models that will justify medium-term and long-term government investment financed by some combination of debt, taxes, issuance, productivity. Justifiable to Senators & Congresspersons who are motivated by greed, but mostly fear.

Not me, of course, I am just trying to find a way to watch.

[Richard H. Serlin]

The Econbrowser post was very important and excellent.

Note that even Martin Feldstein said the shortage of “shovel ready” projects should not be a deterrent in a recession that is likely to last long enough to plan and execute new projects.

[anne]

"Quite ghoulish if you ask me."

My guess is that if we could ask the dead, any of the dead, the response would be that the war on Gaza is quite mad, and such a guess is all the moral authority I need in asking for an end to the war.

Ghoulish? I wonder what is ghoulish? I am a ghoul for peace, wooooo, wooooo.

[Richard H. Serlin]

So let's stimulate the economy with things that will make us much wealthier over the long run like investment in infrastructure, alternative energy, education, advanced broadband, and basic scientific and medical research, rather than doing it the Republican way of tax cuts predominantly for the wealthy, and then encouraging people to spend frivolously on short term consumption of little or no lasting investment value.

It's far better to stimulate the economy by spending on alternative energy and education than on new fashions, yachts, and vacations. Spending on those things make us far poorer over the long than spending on high-return investments of the kind the pure free market will grossly underprovide due to well established in economics market problems like externalities, inability to patent, etc., etc.

[evagrius]

Oh, please! Enough about the Holocaust.

One really has to wonder about the chutzpah of a group of people deciding to invade another people's land, ( where they've been living for over two millenia), use terrorism to drive them out, install a government dependent on U.S. aid, and place the driven out people in what could called rather large camps, and wonder why those people are upset enough to lob rather innacurate, ineffective missiles at them. One also has to wonder how that very same invading group decided that the secular PLO was too dangerous and therefore created and supported a radical Moslem group to destabilize the main organization of the dispossed people, the PLO. One has to wonder why the invading people are surprised that this very same Moslem group, ( after receiving mucho aid and training from them), has decided to attack them instead of the PLO.

Basically, Israel is a secular "western European" country injected into the Middle East. It has little connection with the religion that it officially identifies with, ( the beaches at Tel Aviv are full on Saturday). It uses the ideology of the U.S. "western", ( since when is a group of people taking over land that has been farmed for millenia called "settlers"?), and this pleases the average American since the Israelis shown on TV speak English, ( amazing!).

Israel is a mistake. It can't be undone but it doesn't have to be excused.

[Bruce Wilder]

Nick Rowe: "I don't think we disagree . . . "

Disagree? No, not exactly. I'm struggling to remember what Martin Shubik taught me, and failing.

I'm an institutionalist, and the essence of the institutional view is that social cooperation is organized by institutions, which create, in effect, a virtual reality of games, rule-bound and full of symbolic manipulation. People pursue their ambitions and work in the world of these institutional games, using the markers, rules, scorekeeping of the game, and whatever real needs are satisfied are satisfied as an epiphenomenon of the game.

The reason that the relationship of debt to real wealth is so tricky is that debt is part of the virtual reality of the game. It might as well be Monopoly money. It's useful and it enhances economic welfare, because it facilitates socio-economic cooperation, enabling us to make calculations and deals, which, ultimately, enable us to cooperate in being more productive. Gov't debt, in particular, is a foundation for a whole web of calculation and deal-making stretching into the future -- a literal extension of currency and a benchmark of risk-free values projected thru time.

Currency has value, to the extent that people believe in its future scarcity -- that in the future it will be wanted, but available only to some limited extent. The value of gov't debt is an extension of the currency's value -- it depends on the expectation that the gov't's fiscal capacity is sufficient to keep currency scarce in the future. (If the country is, say, Argentina, limited fiscal capacity may be a recurrent issue.)

Asking whether gov't debt is "wealth" kind of misses the point that gov't debt, like other forms of money, is an instrument of the game, which is the economy. Its "real value" is instrumental -- a way to keep score and make deals.

We're in trouble, because we let some non-governmental actors create debt, in the form of mortgage-backed securities, without a corresponding "fiscal" capacity to fund the debt. There wasn't enough household income in prospect to fund the MBS. It is as if a bunch of crazed libertarians and their plutocratic masters were allowed to set up their own Private Argentina in the United States; that Private Argentina has defaulted, creating a financial crisis.

The virtual reality signals -- the expectations of future economic activity nominated in dollars -- are all wrong for a well-functioning economic game.

The movie, the Matrix, provides a great metaphor for our situation. There is a real economy, underlying the financial maya. Getting them properly aligned again is tricky, though. It is quite possible for a significant part of the real economy to simply tumble out of the circular flow, out of the web of socio-economic cooperation, as people act on the game signals and imperatives provided by the money economy.

Most people are well-trained in the imperatives and strategies of the virtual reality provided by the financial, money economy. What Krugman calls Deflationary Economics, though, is about when that virtual reality world is malfunctioning -- rather like the way the Matrix is revealed to be a malfunctioning illusion in the movie of the same name.

I don't know if that makes my earlier metaphoric fancy any clearer.

[Bruce Wilder]

bob mcmanus: "some people are trying to do math here"

Very funny line.

[Bruce Wilder]

Calculated Risk: The Obama Stimulus Plan has a chart that reflects a charmless faith in the self-equilibrating power of the economy that I'm not sure I share.

Christina Romer and Larry Summers make me uncomfortable.

[Beezer]

Debt Today, Prosperity Tomorrow
January 10th, 2009
If you spend $2 trillion today, and as a result, don’t have to spend $3 trillion tomorrow for oil and other fossil fuels, have you made a wise investment decision?

If you spend $2 trillion today, and as a result, don’t have to spend $3 trillion tomorrow cleaning up an environmental mess, have you made a wise investment decision?

Of course you have. You’ve nurtured your environment, you have husbanded your resources. Your economy will prosper, as will your citizens. It’s not about debt, it’s about your investment decisions. Debt leverages positives as well as negatives. We’ve just witnessed the negative consequences of the unwise use of debt (leverage). Let’s not recoil from debt, per se, but embrace debt as a tool to leverage the positives.

Obama speaks of making a “down payment” on our future regarding clean energy and robust infrastructures. He’s not quite got there in terms of explaining to all of us what his vision is, but this is what it is. The quicker he gets “on message” the better it is for all of us.

[Fred]

Balance sheet analysis will clarify some of the issues Nick Rowe raised. Households balance sheets have lost something over $10 trillion, about $4 trillion due to the housing bust and the rest due to the stock market crash. Households will inevitably attempt to compensate for this blow to their net worth by saving, and for this to happen, someone else must run up compensating debt. Corporations are in no mood to run up debt voluntarily, so that leaves the government. If the government doesn't run up enough debt, then the savings by households will cause corporations to run up debt involuntarily. In other words, corporations will show losses or declining profits, which will cause further declines in household balance sheets (more stock market declines) and more layoffs, which will then cause a further rise in household savings, and the vicious deflationary spiral goes on and on. This is the real reason we need a massive run-up in government debt. I have disregarded the foreign factor from this analysis. Given that we are running a trade deficit, the foreign factor merely worsens things (more government debt is required than without a trade deficit).

As always, there is an applicable quote from Keynes (my comments in italics): "People want the moon (credits on household balance sheets without corresponds debt somewhere else in the system) but we can't give them that. So instead we give them green cheese (credits on household balance sheets exactly matched by debts somewhere else in the system) and to that we open a green cheese factory (a central bank to create enough government debt to match the desire by households to accumulate financial credits).

[evagrius]

"They'd been building up a state for 50 years already to that point. But what do you care about history when it's time to demonize the Jews?"

Go look up the history yourself. They were not "building up a state". They settled there as members of first, the Ottoman Empire and then as living under British authority, ( which they managed to attack on occasion).

The 1948 war should not have happened and would not have happened if there had been some consideration about the people living in that area. But I forget, they're only primitive savages.

I'm not "demonizing the Jews", just showing another view that's not often heard.

Anyway, enough of that.

Go back to talking about money. It's safer.

[Nick Rowe]

Bruce Wilder: Yes, that does make it clear(er). We agree more than either of us thought we did. I used to read a lot of Shubik's stuff 30 years ago when I was working on "new institutional economics" and trying (mostly failing) to apply it to monetary theory.

But it's hard to think that way, especially all the time, and sometimes we need to just "take for granted" the rules of the game and social meaning of debt, and ask simpler questions about whether debt is an addition or subtraction from real wealth. There are enough misconceptions about those simpler questions.

[anne]

"Go back to talking about money. It's safer."

Remember, always remember, never ever forget, the most important thing to remember about war is that it has nothing to do with economics, especially when vastly wealthy societies rip to pieces poor or even the poorest of societies. Iraq, Afghanistan, Somalia, Gaza; no economics there, only millions of desperate people. Remember as well, that where there came to be discussion of Iraq, discussion reaching even to the economics of war, the wars in Afghanistan, Somalia and Gaza are beyond discussion whether economically or otherwise, at least in America.

No matter the people of the poorest of poor countries will suffer the more, and the wars will be boastfully won.