Category Archive for: Fiscal Policy [Return to Main]

Sunday, June 07, 2015

'The Economic Consequences of Austerity'

From today's links, Amartya Sen on the turn to austerity during the Great Recession (there's a lot more in the full text):

The economic consequences of austerity, by Amartya Sen: ...As it is quite common these days to blame economists for failing to see the real world, I take this opportunity to note that very few professionally trained economists were persuaded by the direction in which those in charge of European finances decided to take Europe. The European debacle demonstrated, in effect, that you do not need economists to generate a holy mess: the financial sector can generate its own gory calamity with the greatest of elegance and ease. Further, if the policy of austerity deepened Europe’s economic problems, it did not help in the aimed objective of reducing the ratio of debt to GDP to any significant extent – in fact, sometimes quite the contrary. ...
If failing to understand some basic Keynesian relations is a part of the explanation of what happened, there was also another, and more subtle, story behind the confounded economics of austerity. There was an odd confusion in policy thinking between the real need for institutional reform in Europe and the imagined need for austerity – two quite different things. There can be little doubt that Europe has needed, for quite some time, many serious institutional reforms – from the avoidance of tax evasion and the fixing of more reasonable retiring ages to sensible working hours and the elimination of institutional rigidities, including those in the labour markets. But the real (and strong) case for institutional reform has to be distinguished from an imagined case for indiscriminate austerity, which does not do anything to change a system while hugely inflicting pain. ...
An analogy can help to make the point clearer: it is as if a person had asked for an antibiotic for his fever, and been given a mixed tablet with antibiotic and rat poison. You cannot have the antibiotic without also having the rat poison. We were in effect being told that if you want economic reform then you must also have, along with it, economic austerity, although there is absolutely no reason whatsoever why the two must be put together as a chemical compound. For example, having sensible retiring ages, which many European countries do not (a much-needed institutional reform), is not similar to cutting severely the pensions on which the lives of the working poor may depend (a favourite of austeritarians). The compounding of the two – not least in the demands made on Greece – has made it much harder to pursue institutional reforms. ...

Wednesday, June 03, 2015

Krugman vs. DeLong

Krugman vs. DeLong has an outcome that follows DeLong's rule:

Krugman: The Inflationista Puzzle: Martin Feldstein has a new column on what he calls the “inflation puzzle” — the failure of inflation to soar despite the Fed’s large asset purchases, which led to a very large rise in the monetary base. As Tony Yates points out, however, there’s nothing puzzling at all about what happened; it’s exactly what you should expect when interest rates are near zero.
And this isn’t an ex-post rationale, it’s what many of us were saying from the beginning. Traditional IS-LM analysis said that the Fed’s policies would have little effect on inflation; so did the translation of that analysis into a stripped-down New Keynesian framework that I did back in 1998, starting the modern liquidity-trap literature. ...
DeLong: New Economic Thinking, Hicks-Hansen-Wicksell Macro, and Blocking the Back Propagation Induction-Unraveling from the Long Run Omega Point: ... Whatever may be going on in the short run must thus be transitory in duration, moderate in their effects, and limited in the distance it can can push the economy away from its proper long run equilibrium. And it certainly cannot keep it there. Not for long.
This is the real critique of Paul Krugman’s “depression economics”. Paul can draw his Hicksian IS-LM diagrams of an economy stuck in a liquidity trap...
He can draw his Wicksellian I=S diagrams of how the zero lower bound forces the market interest rate above the natural interest rate at which planned investment balances savings that would be expected were the economy at full employment...
Paul can show, graphically, that conventional monetary policy is then completely ineffective–swapping two assets that are perfect substitutes for each other. Paul can show, graphically, that expansionary fiscal policy is then immensely powerful and has no downside: it does not generate higher interest rates; it does not crowd out productive private investment; and, because interest rates are zero, it entails no financing burden and thus no required increase in future tax wedges. But all this is constrained and limited by the inescapable and powerful logic of the induction-unraveling propagating itself back through the game tree from the Omega Point that is the long run equilibrium. In the IS-LM diagram, the fact that the long run is out there means that even the contemplation of permanent expansion of the monetary base is rapidly moving the IS curve up and to the right, and thus leading the economy to quickly exist the liquidity trap. In the Wicksellian I=S diagram, the fact that the long run is out there means that even the contemplation of permanent expansion of the monetary base is rapidly moving the I=S curve up so that the zero lower bound will soon no longer constrain the economy away from its full-employment equilibrium.
The “depression economics” equilibrium Paul plots on his graph is a matter for today–a month or two, or a quarter or two, or at most a year or two. ...
Krugman:Backward Induction and Brad DeLong (Wonkish): Brad DeLong is, unusually, unhappy with my analysis in a discussion of the inflationista puzzle — the mystery of why so many economists failed to grasp the implications of a liquidity trap, and still fail to grasp those implications despite 6 years of being wrong. Brad sorta-kinda defends the inflationistas on the basis of backward induction; I find myself somewhat baffled by that defense.

Actually, I find myself baffled both theoretically and empirically. ...

In the end, while the post-2008 slump has gone on much longer than even I expected (thanks in part to terrible fiscal policy), and the downward stickiness of wages and prices has been more marked than I imagined, overall the model those of us who paid attention to Japan deployed has done pretty well — and it’s kind of shocking how few of those who got everything wrong are willing to learn from their failure and our success.
DeLong: Paul Krugman Was Right. I, Ken Rogoff, Marty Feldstein, and Many, Many Others Were Wrong: The question is: Why were we wrong? We had, after all, read, learned, and taught the same Hicks-Hansen-Wicksell-Metzler-Tobin macro that was Paul Krugman’s foundation. ...

I want to highlight one of Brad's points. Theoretical models often act as if there is only one type of demand shock, and the short-run depends upon a single variable, e.g. the time period when inflation expectations are wrong. But the short-run depends upon the type of recession we experience, and the variable that signals the length of the recovery will not be the same in every case. A monetary induced recession will have a much shorter short-run than a balance sheet recession induced by a financial collapse, and an recession caused by an oil price shock will recover differently from both. Early in the Great Recession, policymakers, analysts, and most economists did not fully recognize that this recession truly was different, and hence required a different policy approach from the recessions in recent memory. Krugman, due to his work on Japan, did see this early on, but it took time for the notion of a balance sheet recession to take hold, and we never fully adopted fiscal policy to deal with this fact (e.g. sufficient help with rebuilding household balance sheets). To me this in one of the big lessons of the Great Recession -- we must figure out the type of recession we are experiencing, realize that the "short-run" will depend critically on the type of shock causing the recession, and adopt our policies accordingly. If we can do that, then maybe the short-run won't be a decade long the next time we have a balance sheet recession. And there will be a next time.

Tuesday, June 02, 2015

'Stop Obsessing Over Debt and Watch Growth Flourish, IMF Economists Argue'

From those radicals at the IMF:

Stop Obsessing Over Debt and Watch Growth Flourish, IMF Economists Argue: ...Rather than being obsessed by debt, some countries should spur growth by not paying down their debt, argue top economists from the IMF, the institution largely tasked with helping countries cut their debt burdens. ...
Jonathan Ostry, deputy director of the IMF’s Research Department, and two other economists in his division, Atish Ghosh and Raphael Espinoza. ... say that many policy makers—here’s looking in particular at you, Berlin—have a “debt obsession” and aren’t fully factoring in the cost of insuring against future crises by paying down the debt.
“Advocates of ‘fixing the debt problem’ stress the crisis-insurance benefit, without mentioning the upfront cost of insurance,” Mr. Ostry said. “Insurance can be expensive in terms of the higher taxation needed to run a budget surplus.” ...
They aren’t arguing for all countries to halt their plans to cut debt. Rather, they contend that some countries have room in their budgets to spend more to stimulate growth without raising borrowing costs and fueling investors’ concerns. ... “For countries that have fiscal space, the cost of insurance is likely to be much larger than the benefit,” Mr. Ostry said. ...

Thursday, May 21, 2015

'Conservatives and Keynes'

This, from Paul Krugman, is sort of a setup for the post below this one:

Conservatives and Keynes: ...the debate over business-cycle economics has always been a left-right thing. Specifically, the right has always been deeply hostile to the notion that expansionary fiscal policy can ever be helpful or austerity harmful; most of the time it has been hostile to expansionary monetary policy too... So the politicization of the macro debate isn’t some happenstance, it evidently has deep roots.
Oh, and some of us have been discussing those roots in articles and blog posts for years now. We’ve noted that after World War II there was a concerted, disgraceful effort by conservatives and business interests to prevent the teaching of Keynesian economics in the universities, an effort that succeeded in killing the first real Keynesian textbook. Samuelson, luckily, managed to get past that barrier — and many were the complaints. ...
What’s it all about, then? The best stories seem to involve ulterior political motives. Keynesian economics, if true, would mean that governments don’t have to be deeply concerned about business confidence, and don’t have to respond to recessions by slashing social programs. Therefore it must not be true, and must be opposed. ...
If you think I’m being too flip, too conspiracy-minded, or both, OK — but what’s your explanation? For conservative hostility to Keynes is not an intellectual fad of the moment. It has absolutely consistent for generations, and is clearly very deep-seated.


'1776: The Revolt Against Austerity'

Steve Pincus at the New York Review of Books:

1776: The Revolt Against Austerity: Was the Declaration of Independence a powerful indictment of British austerity policies? Does America’s founding document need to be seen as part of an economic debate about the British Empire? ... Just as political debates in Britain and the United States today turn in large part on the response to the great recession of 2008, so the events that made the United States were shaped by the British imperial government’s reaction to the debt crisis of the 1760s. What made the Declaration so offensive to British politicians then ... is that America’s founders offered a blueprint for a different kind of state response to fiscal crisis. ... [explains how debt crisis led to austerity policies for the colonies] ...
What alternative strategy did the authors of the Declaration propose? Today, we tend to regard the practice of using government spending to stimulate economic growth as an invention of John Maynard Keynes in the 1930s. But already in the eighteenth century, self-styled Patriots, followers of Pitt on both sides of the Atlantic, argued that what the British Empire needed if it was to recover from the fiscal crisis was not austerity but an economic stimulus. ...
Twenty-first century American politicians routinely draw our attention to our founding moment and founding document... But they fail to understand the economic arguments that in large measure shaped what Thomas Jefferson and his colleagues wrote. When Governor Scott Walker of Wisconsin proudly proclaims that “we celebrate the fourth of July and not April 15, because in America we celebrate our independence from the government, not our dependence on them [sic],” he fails to see that our founders blamed George III and his government not for taxing too much but for doing too little to stimulate consumer demand. ...
America’s founding document called for an American state that would promote economic growth just as the British state had done before the shift toward balancing the books. ... Had George III and his ministers not adopted austerity measures in the 1760s and 1770s, had they chosen to follow Pitt’s policies of economic stimulus, America’s founders might not have needed to declare their independence at all.

[That's only a small part of the essay -- there's a lot more in the full post, e.g. an argument the Adam Smith supported expansionary policy for the colonies.]

Saturday, May 02, 2015

'Assessing the Effects of Monetary and Fiscal Policy'

From the NBER Reporter:

Assessing the Effects of Monetary and Fiscal Policy, by Emi Nakamura and Jón Steinsson, NBER Reporter 2015 Number 1: Research Summary: Monetary and fiscal policies are central tools of macroeconomic management. This has been particularly evident since the onset of the Great Recession in 2008. In response to the global financial crisis, U.S. short-term interest rates were lowered to zero, a large fiscal stimulus package was implemented, and the Federal Reserve engaged in a broad array of unconventional policies.
Despite their centrality, the question of how effective these policies are and therefore how the government should employ them is in dispute. Many economists have been highly critical of the government's aggressive use of monetary and fiscal policy during this period, in some cases arguing that the policies employed were ineffective and in other cases warning of serious negative consequences. On the other hand, others have argued that the aggressive employment of these policies has "walk[ed] the American economy back from the edge of a second Great Depression."1
In our view, the reason for this controversy is the absence of conclusive empirical evidence about the effectiveness of these policies. Scientific questions about how the world works are settled by conclusive empirical evidence. In the case of monetary and fiscal policy, unfortunately, it is very difficult to establish such evidence. The difficulty is a familiar one in economics, namely endogeneity. ..

After explaining the endogeneity problem, empirical evidence on price rigidity and its importance for assessing policy, structural modeling, natural experiments, and so on, they turn to their evidence:

Our identification approach is to study how real interest rates respond to monetary shocks in the 30-minute intervals around Federal Open Market Committee announcements. We find that in these short intervals, nominal and real interest rates for maturities as long as several years move roughly one-for-one with each other. Changes in nominal interest rates at the time of monetary announcements therefore translate almost entirely into changes in real interest rates, while expected inflation moves very little except at very long horizons.
We use this evidence to estimate the parameters of a conventional monetary business cycle model. ... This approach suggests that monetary non-neutrality is large. Intuitively, our evidence indicates that a monetary shock that yields a substantial response for real interest rates also yields a very small response for inflation. This suggests that prices respond quite sluggishly to changes in aggregate economic conditions and that monetary policy can have large effects on the economy.
Another area in which there has been rapid progress in using innovative identification schemes to estimate the impact of macroeconomic policy is that of fiscal stimulus.9 ... Much of the literature on fiscal stimulus that makes use of natural experiments focuses on the effects of war-time spending, since it is assumed that in some cases such spending is unrelated to the state of the economy. Fortunately - though unfortunately for empirical researchers - there are only so many large wars, so the number of data points available from this approach is limited.
In our work, we use cross-state variation in military spending to shed light on the fiscal multiplier.10 The basic idea is that when the U.S. experiences a military build-up, military spending will increase in states such as California - a major producer of military goods - relative to states, such as Illinois, where there is little military production. This approach uses a lot more data than the earlier literature on military spending but makes weaker assumptions, since we require only that the U.S. did not undertake a military build-up in response to the relative weakness of the economy in California vs. Illinois. We show that a $1 increase in military spending in California relative to Illinois yields a relative increase in output of $1.50. In other words, the "relative" multiplier is quite substantial.11
There is an important issue of interpretation here. We find evidence of a large "relative multiplier," but does this imply that the aggregate multiplier also will be large? The challenge that arises in interpreting these kinds of relative estimates is that there are general equilibrium effects that are expected to operate at an aggregate but not at a local level. In particular, if government spending is increased at the aggregate level, this will induce the Federal Reserve to tighten monetary policy, which will then counteract some of the stimulative effect of the increased government spending. This type of general equilibrium effect does not arise at the local level, since the Fed can't raise interest rates in California vs. Illinois in response to increased military spending in California relative to Illinois.
We show in our paper, however, that the relative multiplier does have a very interesting counterpart at the level of the aggregate economy. Even in the aggregate setting, the general equilibrium response of monetary policy to fiscal policy will be constrained when the risk-free nominal interest rate is constrained by its lower bound of zero. Our relative multiplier corresponds more closely to the aggregate multiplier in this case.12 Our estimates are, therefore, very useful in distinguishing between new Keynesian models, which generate large multipliers in these scenarios, and plain vanilla real business cycle models, which always generate small multipliers.
The evidence from our research on both fiscal and monetary policy suggests that demand shocks can have large effects on output. Models with price-adjustment frictions can explain such output effects, as well as (by design) the microeconomic evidence on price rigidity. Perhaps this evidence is still not conclusive, but it helps to narrow the field of plausible models. This new evidence will, we hope, help limit the scope of policy predictions of macroeconomic models that policymakers need to consider the next time they face a great challenge. ...

Wednesday, April 15, 2015


About that confidence fairy. This is from Simon Wren-Lewis

Confidence: Francesco Saraceno reminds us about the days in which very important people believed in the confidence fairy (aka expansionary fiscal austerity), which are not so very far away. He also points to some recent ECB research which shows that confidence - as measured by surveys - clearly falls following fiscal austerity. The confidence fairy, rather than waving her wand to make everything alright again, may be making austerity worse. 
However, looking at the research in detail revealed some results I found at first surprising. In particular, revenue cuts have a bigger effect on consumer confidence than spending cuts. In terms of GDP impacts, theory - and most but not all empirical evidence - suggests that temporary spending cuts will have a larger impact on overall activity than temporary tax increases, if there is no monetary offset and incentive effects are not very large. Do these empirical results contradiction this?
To answer that you need to ask two further questions. First, what does consumer confidence actually measure? Second, and perhaps more interesting, what information do fiscal announcements actually reveal. ...[goes on to explain]...
Trying to evaluate the impact of past fiscal actions is complicated, in large part because it is difficult to know what the counterfactual was, or what people thought the counterfactual was. Were changes thought to temporary or permanent? (Governments hardly ever say, and even if they did would they be trusted?) To what extent do people internalise the government’s budget constraint? If they do, are fiscal changes telling us about the timing of taxes or spending, or their mix, or something else? It seems to me that these difficulties arise whether we are trying to assess the impact of fiscal changes on confidence, or on activity itself.

Thursday, March 26, 2015

'Fiscal policy Procyclicality and Output Forecast Errors: Bad Luck or Bad Decisions?'

Why do developing countries pursue destabilizing, procyclical fiscal policy? This is from Guillermo Vuletin and Leopoldo Avellan at Brookings:

Fiscal policy procyclicality and output forecast errors: Bad luck or bad decisions?: It is well-known that government spending has historically been procyclical in the developing world (Tornell and Lane, 1999; Kaminsky, Reinhart, and Vegh, 2004; Frankel, Vegh, and Vuletin, 2013).[1] Thus, government spending in these regions typically increases during periods of expansion and decreases during periods of recession. Unfortunately, this procyclical fiscal behavior reinforces output fluctuations, exacerbating booms and aggravating busts. Traditional explanations for this undesirable behavior have mostly revolved around the explicit or implicit notion that fiscal procyclicality is the deliberate result of political economy distortions and weak institutions (e.g., policymakers' short-sightedness and political pressure to spend when resources are available in good times, leaving few resources to spend in bad times).
Since the global financial crisis and, more recently, the sudden severe drop in commodity prices, important and frequent revisions in output growth forecasts around the world have become a new norm. This trend, in turn, has triggered heated debates in both policy and academic circles and the media about how governments should handle these frequent reassessments.
As a consequence of this debate, two strands of the fiscal procyclicality literature related to output forecast errors have been increasingly gaining support. While different in origin and nature, both strands put the emphasis (or even blame) on output forecast errors in determining fiscal procyclicality. These strands include:
1. Over-optimism in output forecasts (Frankel, 2011a; Frankel, 2011b; Frankel and Schreger, 2013). ...
2. Real-time data and misinformation literature (Forni and Momigliano, 2004; Golinelli and Momigliano, 2006 and 2008; Bernoth, Hughes Hallett, and Lewis, 2008; Cimadomo, 2012; Croushore and van Norden, 2013). ...
A recent paper by Avellan and Vuletin (2015) takes issue with these views and shows that, in fact, traditional political economy arguments and weak institutions help explain how governments handle unanticipated output fluctuations. ...

Thursday, March 12, 2015

Monetary and Fiscal Policy in a Post-Inflation World

Alice Rivlin:

Thoughts about monetary and fiscal policy in a post-inflation world, Brookings: ... Why are we still so focused on fighting inflation? Why are so many people in this room devoting so much time and attention to guessing when the Federal Reserve will start raising short-term interest rates and get back to its “normal” job of protecting us from inflation? Is inflation an important threat to our economic well-being? Is when to raise interest rates the most urgent question facing the Fed at the moment? Or are we suffering from cultural lag?
Collecting linguistic evidence of cultural lags is a minor hobby of mine. I smile when I catch myself referring to the refrigerator as the “ice box,” because that was what my mother called it... I am amused when young people tell me their phones are “ringing off the hook.” Have they ever used a phone with a receiver on a hook? When bureaucrats say they are eager to break out of their silos, I wonder if they if they have ever lived on a farm or anywhere close to a silo. So when politicians and financial journalists ask me earnestly, as they do, whether the Federal Reserve isn’t risking devastating “run-away” inflation by buying all those bonds, I suspect cultural lag. What Inflation? We should be so lucky! Central banks have amply proved that they know how to stop inflation—Paul Volcker showed that. They have been much less successful in getting little inflation going.
A lecture in honor of Paul Volcker is the perfect occasion for raising the fundamental question: are the major advanced economies (US, Europe, Japan) facing a new normal for which current tools of monetary, fiscal, and regulatory policy need to be restructured? ...
Over-coming cultural lag in order to prosper in a post-inflation world will take significant shifts in the mind-set of economists, economic policy-makers, politicians and the public. I see four major challenges to current thinking:
  • We have to recognize that the main job of central banks is avoiding financial crisis.
  • We will have to get used to central banks operating at quite low interest rates much of the time and managing big balance sheets without apologies.
  • We have to rehabilitate budget policy to make it useable again and move to a sustainable debt track at the same time
  • We have to find constitutional ways of reducing the power of big money in politics and economic policy—or change the Constitution.

I will get back to these four challenges, but first a very quick tour through the macro-policy landscape of the last five or six decades. ...

And, later in the essay (it is relatively long, and I don't agree with every single point that is made, e.g. when she defends ‘Simpson-Bowlesism’ and discusses the need to rein in entitlement spending, and when she argues against selling the idea "that unspecified government spending would add to aggregate demand and accelerate the recovery without adverse consequences to the long-run debt... Unspecified spending and near-term debt increase are what the public and elected officials fear, and they are skeptical of fee lunches. Instead, we have to make the case for very specific public investments that can be shown to have positive impacts on productivity growth and future prosperity" -- deficit spending in a recession has a role to play in stimulating the economy in the short-run, we shouldn't focus only on the long-run growth potential of policy -- but I do agree with the the general thrust of her comments):

... Political polarization has led to angry confrontations over the budget for the last several years complete with threats to shut down the government or default on the national debt and bizarre budget decision processes, such as the Super Committee, the fiscal cliff, and sequestration. These shenanigans are unworthy of a mature democracy and horrendously destructive of confidence in rational economic governance. The result has been worse than gridlock. It has been insanely counterproductive budget policy at a time when the federal budget could have been contributing both to faster recovery and to longer run productivity growth.
I believe the Great Recession would have been longer and deeper without the stimulus package of 2009.[8] If the stimulus had been larger and lasted longer, recovery would have been more robust and the Fed might not have found it necessary to do so much quantitative easing. Indeed, it is pretty crazy economics for a country trying to climb out of a deep recession to put the burden of accelerating a recovery on the monetary authorities—a job they have never been great at—in the face of sharply declining federal deficits that made the task of stimulating recovery with monetary tools a lot more challenging. But that is what we did.
I also believe that the United States has been dangerously under-investing in public infrastructure, scientific research, and the skills of our future labor force. Doing everything we can to nudge productivity growth back up again is essential to future prosperity. With the private investment awaiting more demand and confidence, the public sector should be moving strongly into the breach with well-structured investment in everything from roads to technical training to basic research. Instead, our bizarre budget process has been squeezed the very budget accounts that contain most opportunity for public investment. Discretionary spending is at record lows in relation to the size of the economy and headed lower while the highway trust fund is running dry. How crazy is that?
Making budget policy useful again will take major shifts in political thinking, and here I think economists can help if they use arguments the public and politicians can relate to. First, I would recommend not pushing the argument that unspecified government spending would add to aggregate demand and accelerate the recovery without adverse consequences to the long-run debt. Ball, Summers and DeLong may well be right that hysteresis is so serious a consequence of recession that spending now would juice recovery enough to bring down long run debt.[9] But they are never going to sell that argument. Unspecified spending and near-term debt increase are what the public and elected officials fear, and they are skeptical of fee lunches.
Instead, we have to make the case for very specific public investments that can be shown to have positive impacts on productivity growth and future prosperity. This should not be an argument for larger government, but for shifting from less to more effective government spending and from consumption-oriented spending (including spending in the tax code) to growth oriented spending over time. And, oh yes, that means making the tax code more progressive, more pro-growth, and raising additional revenue, as well as restructuring entitlement programs. There is plenty is such an agenda for both liberals and conservatives to like—if only they could be persuaded to talk about it. ...

Tuesday, March 10, 2015

'Spending on Our Crumbling Infrastructure'

David Wessel:

Spending on Our Crumbling Infrastructure: Larry Summers recently said something startling: “At this moment . . . the share of public investment in GDP, adjusting for depreciation, so that’s net share, is zero. Zero. We’re not net investing at all, nor is Western Europe”...
In other words, total federal, state, and local government investment is enough to cover only the amount of wear and tear on bridges, roads, airports, rails, and pipes. “Can that possibly make sense?” asked the former Treasury secretary, who has been campaigning for more government spending on infrastructure.
I wondered whether Mr. Summers was hyping the data to make his point. So I checked. ... Mr. Summers wasn’t exaggerating. ...
All this is happening at a time when the U.S. government can borrow money at very low interest rates... It would seem a good time for the government to borrow for long-term investments, as Mr. Summers frequently says. ...

Thursday, February 26, 2015

'Can Helicopter Money be Democratic?'

Simon Wren-Lewis:

Can helicopter money be democratic?: Helicopter money started as an abstract thought experiment..., in technical terms this is a combination of monetary policy (the creation of money) and fiscal policy (the government giving individuals money). Economists call such combinations a money financed fiscal stimulus. With the advent of Quantitative Easing (QE), it has also been called QE for the people.
Some have tried to suggest that central banks could undertake helicopter money for the first time without the involvement of governments. This is a fantasy that those who dislike the idea of government have concocted. Others who dislike the idea of fiscal policy have suggested that helicopter money is not really a fiscal transfer. That is also nonsense. ...
If initiation by the central bank is the defining feature of helicopter money, and this policy always requires the cooperation of government, might it be possible to imagine a form of helicopter money that was more ‘democratic’? ... A left wing government might decide that, rather than giving money to everyone including the rich, it would be better to increase transfers to the poor. A right wing government might decide it should only go to ‘hard working families’, and turn it into a tax break. We could call this democratic helicopter money.
I can see two problems with democratic helicopter money. ...
Given these problems, why even think about democratic helicopter money? One reason may be political. A long time ago I proposed giving the central bank limited powers to make temporary changes to a small set of predefined tax rates, and I found myself defending that idea in front of the UK’s Treasury Select Committee. To say that the MPs were none too keen on my idea would be an understatement. Making helicopter money democratic may be what has to happen to get politicians to support the idea.

Monday, February 23, 2015

'Even Better Than a Tax Cut'

Larry Mishel:

Even Better Than a Tax Cut: With the early stages of the 2016 presidential campaign underway and millions of Americans still hurting financially, both parties are looking for ways to address wage stagnation. That’s the good news. The bad news is that both parties are offering tax cuts as a solution. What has hurt workers’ paychecks is not what the government takes out, but what their employers no longer put in — a dynamic that tax cuts cannot eliminate. ...
Yes, a one-time reduction in taxes through, say, expanded child care credits or a secondary earner tax break, as Democrats propose, could help families. But as wages continue to stagnate, it is impossible to continuously cut taxes and still pay for things like education and social programs for the growing population of older Americans. ...
Contrary to conventional wisdom, wage stagnation is not a result of forces beyond our control. It is a result of a policy regime that has undercut the individual and collective bargaining power of most workers. Because wage stagnation was caused by policy, it can be reversed by policy, too.

Monday, February 02, 2015

Paul Krugman: The Long-Run Cop-Out

Focusing on the long-run and avoiding the harder, more important short-run questions is "craven and irresponsible"

The Long-Run Cop-Out, by Paul Krugman, Commentary, NY Times: On Monday, President Obama will call for a significant increase in spending, reversing the harsh cuts of the past few years. He won’t get all he’s asking for, but it’s a move in the right direction. And it also marks a welcome shift in the discourse. ... It’s often said that the problem with policy makers is that they’re too focused on the next election, that they look for short-term fixes while ignoring the long run. But the story of economic policy and discourse these past five years has been exactly the opposite.
Think about it: Faced with mass unemployment and the enormous waste it entails, for years the Beltway elite devoted almost all their energy not to promoting recovery, but to Bowles-Simpsonism — to devising “grand bargains” that would address the supposedly urgent problem of how we’ll pay for Social Security and Medicare a couple of decades from now.
And this bizarre long-termism isn’t just an American phenomenon. ...
Am I saying that the long run doesn’t matter? Of course not, although some forms of long-termism don’t make sense even on their own terms. Think about the notion that “entitlement reform” is an urgent priority..., why, exactly, is it crucial that we deal with the threat of future benefits cuts by locking in plans to cut future benefits?...
All too often, or so it seems to me, people who insist that questions of austerity and stimulus are unimportant are actually trying to avoid hard thinking about the nature of the economic disaster that has overtaken so much of the world.
And they’re also trying to avoid taking a stand that will expose them to attack. Discussions of short-run fiscal and monetary policy are politically charged. ... I understand why it’s tempting to dismiss the whole debate and declare that the really important issues involve the long run. But while people who say that kind of thing like to pose as brave and responsible, they’re actually ducking the hard stuff — which is to say, being craven and irresponsible. ...
So it’s important to understand who’s really irresponsible here. In today’s economic and political environment, long-termism is a cop-out, a dodge, a way to avoid sticking your neck out. And it’s refreshing to see signs that Mr. Obama is willing to break with the long-termers and focus on the here and now.

Sunday, February 01, 2015

'Saying the Obvious' (about Fiscal Policy)

Simon Wren-Lewis:

Saying the obvious: Give any student who has just done a year of economics some national accounts data for the US, UK and Eurozone, and ask them why the recovery from the Great Recession has been so slow, and they will almost certainly tell you it is because of fiscal austerity. And they would be right, as I set out in this recent VoxEU piece. There I present some back of the envelope calculations, but they are confirmed by model simulations: not just those I quoted in the text, but also others that I did not have space to mention.
When writing that piece, I kept having doubts. Not about the analysis, but just that this was all so obvious. It uses basic models (DSGE or more eclectic) that we teach undergraduates and postgraduates. It is supported by the clear majority of empirical evidence. I felt like I was telling people the macroeconomic equivalent of a rise in the demand for apples will mean an increase in their price.

The reason I put those doubts aside are also familiar. The fact that at least half the world’s politicians and mediamacro continue to ignore the obvious. ...

Economics is always in danger of being corrupted by politics and ideology, and macroeconomics seems particularly vulnerable in this respect. ... Some say that this corruption is inevitable and that we should embrace it, rather than attempt to avoid it through delegation to institutions like independent central banks. I disagree: demand management is basically a technical issue with political implications. If we did not have independent central banks today, I suspect we would be seeing the US congress voting to raise interest rates. And of course there would be a few economists with their models saying it was a good idea, even though the vast majority thought otherwise. ...

We therefore need to rethink how stabilisation policy is done at the Zero Lower Bound (ZLB)..., so it would be prudent to complete the delegation of macroeconomic stabilisation policy that was begun by making the operation of interest rate policy independent of political control. Doing that would also be a good opportunity to revisit the arrangements that can ensure independence is compatible with accountability and some degree of democratic oversight.   

Sunday, January 25, 2015

Fiscal Cliff Forecasts

Robert Waldmann:

2013 and all that II: A fairly large number of economists have argued that Keynesians predicted that the fiscal cliff January 2013 and sequestration March 2013 would cause a recession. A fairly large number of Keynesian economists have denied personally making that prediction (including the oversigned). Only following a complaint in comments will I look up all the links at which I just hinted.
I think it is fairly easy to decide if the orthodox Keynesian view was that 2013 fiscal contraction would cause a recession. The reason is that official forecasts are Keynesian. The forecasting models range from new Keynesian with added epicycles for the Bank of England to paleo Keynesian for the Fed.
So I decided to look up forecasts for 2013. The advantage is that official forecasts include a precise guess of the expected value of future variables...

Saturday, January 24, 2015

'Did the Keynesians Get It Wrong in Predicting a Recession in 2013?'

Dean Baker:

Did the Keynesians Get It Wrong in Predicting a Recession in 2013?:  I have had several readers send me a blogpost from Scott Sumner saying that the Keynesians have been dishonest in not owning up to the fact that they were wrong in predicting a recession in 2013. The argument is that supposedly us Keynesian types all said that the budget cuts and the ending of the payroll tax cut at the start of 2013 would throw the economy back into recession. (Jeffrey Sachs has made similar claims.)
That isn't my memory of what I said at the time, but hey we can check these things. I looked at a few of my columns from the fall of 2012 and they mostly ran in the opposite direction. The Washington insider types were hyping the threat of the "fiscal cliff" in the hope of pressuring President Obama and the Democrats to make big concessions on Social Security and Medicare. They were saying that even the risk of falling off the cliff could have a big impact on growth in the third and fourth quarter of 2012.
My columns and blogposts (e.g. here, here, here, here, and here) were largely devoted to saying this was crap. I certainly agreed that budget cutbacks and the end of the payroll tax cuts would dampen growth, but the number was between 0.5-0.8 percentage points. This left us far from recession. (All my columns and blogposts from this time are at the CEPR website, so folks can verify that I didn't do any cherry picking here.)
I know Paul Krugman is the real target here, not me, but we've been seeing the economy pretty much the same way since the beginning of the recession. If he had a different story at the time I think I would remember it. But his columns and blogposts are archived too. I really don't think anyone will find him predicting a recession in 2013, although I'm sure he also said that budget cuts and tax increases would dampen growth. 
Anyhow, I'm generally happy to stand behind the things I've said, and when they are proven wrong I hope I own up to it. But I don't see any apologies in order. No recession happened in 2013 and none was predicted here.

I don't recall predicting a recession either (the "they" intended to tar all Keynesians refers to just a few people), just that it would be a drag on growth (the CBO predicted 0.6%). In any case, not much can be said unless one takes the time to estimate a model, use it as a baseline, and then ask the model how the economy would have done in an alternative world where policy was different. Just because we still had growth after the budget cuts does not prove or disprove anything. Even if growth rises under austerity, you can't say it would not have risen a bit more more without austerity (all else is far from equal) unless you have done the hard work of estimating a defensible model and then asking it these questions. Similarly, you can't say much about the degree of monetary offset unless you have taken the time to do the econometrics to support it. But with changes this small -- the impact was predicted to be much less than one percent of growth by most models -- it is very hard to get statistically significant differences in any case.

The problem is that there is no model that all economists agree is "best" for these purposes, and the answer one gets depends upon the particular choice of models. Choose a model that delivers small fiscal multipliers and you get one answer, use a model with bigger multipliers and the answer changes. But even the models with the largest multipliers did not predict a recession, only a drag on growth (generally less than one percent) so the fact that we still had growth says nothing about the impact of the policy, or the degree of monetary offset.

Friday, January 23, 2015

Paul Krugman: Much Too Responsible

Europe’s self-indulgent "archons of austerity" and "doyens of deflation":

Much Too Responsible, by Paul Krugman, Commentary, NY Times: The United States and Europe have a lot in common. Both are multicultural and democratic; both are immensely wealthy; both possess currencies with global reach. Both, unfortunately, experienced giant housing and credit bubbles between 2000 and 2007, and suffered painful slumps when the bubbles burst.
Since then, however, policy on the two sides of the Atlantic has diverged. In one great economy, officials have shown a stern commitment to fiscal and monetary virtue, making strenuous efforts to balance budgets while remaining vigilant against inflation. In the other, not so much.
And the difference in attitudes is the main reason the two economies are now on such different paths. ... No, it’s not morning in America... Recovery could and should have come much faster, and family incomes remain well below their pre-crisis level. Although you’d never know it from the public discussion, there’s overwhelming agreement among economists that the Obama stimulus of 2009-10 helped limit the damage..., but it was too small and faded away far too fast. ...
Europe, on the other hand ... did almost everything wrong. On the fiscal side, Europe never did much stimulus, and quickly turned to austerity ... despite high unemployment. On the monetary side, officials fought the imaginary menace of inflation, and took years to acknowledge that the real threat is deflation. ...
Monetary policy got much better after Mario Draghi became president of the European Central Bank in late 2011. ... But it’s not at all clear that he has the tools to fight off the broader deflationary forces set in motion by years of wrongheaded policy. ...
The terrible thing is that Europe’s economy was wrecked in the name of responsibility. ... In a depressed economy..., a balanced-budget fetish and a hard-money obsession are deeply irresponsible. Not only do they hurt the economy in the short run, they can — and in Europe, have — inflict long-run harm, damaging the economy’s potential and driving it into a deflationary trap that’s very hard to escape.
Nor was this an innocent mistake. The thing that strikes me about Europe’s archons of austerity, its doyens of deflation, is their self-indulgence. They felt comfortable, emotionally and politically, demanding sacrifice (from other people) at a time when the world needed more spending. They were all too eager to ignore the evidence that they were wrong.
And Europe will be paying the price for their self-indulgence for years, perhaps decades, to come.

Tuesday, January 13, 2015

'Selective Voodoo'

Paul Krugman:

Selective Voodoo: House Republicans have passed a measure demanding that the Congressional Budget Office use “dynamic scoring” in its revenue projections — taking into account the supposed positive growth effects of tax cuts. It remains to be seen how much damage this rule will actually cause. The reality is that there is no evidence for the large effects that are central to right-wing ideology, so the question is whether CBO will be forced to accept supply-side fantasies.
Meanwhile, one thing is fairly certain: CBO won’t be applying dynamic scoring to the positive effects of government spending, even though there’s a lot of evidence for such effects.
A good piece in yesterday’s Upshot reports on a recent study of the effects of Medicaid for children; it shows that children who received the aid were not just healthier but more productive as adults, and as a result paid more taxes. So Medicaid for kids may largely if not completely pay for itself. It’s a good guess that the Affordable Care Act, by expanding Medicaid and in general by ensuring that more families have adequate health care, will similarly generate significant extra growth and revenue in the long run. Do you think the GOP will be interested in revising down estimates of the cost of Obamacare to reflect these effects? ...

Saturday, January 10, 2015

'Orthodoxy, Heterodoxy, and Ideology'

Paul Krugman:

Orthodoxy, Heterodoxy, and Ideology: Many economists responded badly to the economic crisis. And there’s a lot wrong with mainstream economic analysis. But how closely are these two assertions related? Not as much as you might think. So I’m very much in accord with Simon Wren-Lewis on the remarkable unhelpfulness of recent heterodox assaults on the field. Not that there’s anything wrong with being heterodox in general; but a lot of what we’ve been seeing misidentifies the problem, and if anything gives aid and comfort to the wrong people.
The point is that standard macroeconomics does NOT justify the attacks on fiscal stimulus and the embrace of austerity. On these issues, people like Simon and myself have been following well-established models and analyses, while the austerians have been making up new stuff and/or rediscovering old fallacies to justify the policies they want. Formal modeling and quantitative analysis doesn’t justify the austerian position; on the contrary, austerians had to throw out the models and abandon statistical principles to justify their claims.
Let’s look at several examples. ...

See also Chris Dillow: Heterodox economics & the left.

It's remarkable how many people rejected the conclusions of *modern* macroeconomic models (or invented nonsense) in order to oppose fiscal policy. It seemed to have more to do with ideology (the government can't possible help no matter what the model says...) and identification (I'm a serious macroeconomist, don't lump me in with all those old fashioned Keynesian hippie types) than with standard macroeconomic analysis.

On this point, see Simon Wren-Lewis: Faith based macroeconomics.

Wednesday, January 07, 2015

The Mythical Confidence Fairy

After harming the recovery from the Great Recession -- and making it harder for the unemployed to find jobs -- through austerity, blocking jobs bills, and standing in the way of additional stimulus measures, Republicans are trying to take credit for the recovery. They made things worse, and when they stopped doing harmful things, the economy improved and they want credit for that:

The new Senate majority leader, Mitch McConnell, suggested earlier today that the Republican Party deserves credit for recent data showing that the economic recovery has picked up speed. ... Mr. McConnell is claiming credit for a recovery based solely on the fact that Republicans have just taken control of both houses of Congress...
Here’s what Mr. McConnell said on the floor this morning:
“After so many years of sluggish growth, we’re finally starting to see some economic data that can provide a glimmer of hope. The uptick appears to coincide with the biggest political change of the Obama Administration’s long tenure in Washington: the expectation of a new Republican Congress.”

That deserves ridicule. Republicans were terribly wrong about Federal Reserve policy, just as wrong about austerity and the confidence fairy, yet here they are once again telling us that the confidence fairy rather than the end of their awful policy is responsible for the recovery.

'Sachs and the Age of Diminished Expectations'

Simon Wren-Lewis is "fed up":

Sachs and the age of diminished expectations: I do not normally talk much about the US economy, because there are so many others writing articles and posts that can do so with more authority. But I am getting increasingly fed up with people telling me that US growth disproves the idea that austerity is bad for you at the Zero Lower Bound (ZLB). Jeffrey Sachs just joins a long list.
Of course the proper way to tackle this is as Paul Krugman does. As he says other stuff happens (like a large fall in the US savings ratio in 2013), so you need to go beyond a single country and look at lots of data. However this might leave the impression that somehow the US case is unusual and does not fit a Keynesian story. In this respect I did a simple exercise...

After presenting his exercise -- he compares a counterfactual where there was no austerity to the actual austerity driven path for the US -- he concludes:

With recent US experience, there is no case against Keynesian analysis to answer. 
This suggests to me two things. First, lots of people are desperate to show that critics of austerity at the ZLB are wrong, and are prepared to make nonsense arguments to that end. This may be particularly true if you very publicly proclaimed the need for austerity in 2010 (note the co-author: HT John McHale). Second, it is a sad day when anyone thinks that 2.3% growth is “brisk” when we are recovering from a deep recession and interest rates have remained at the ZLB. It is so very dangerous when these diminished expectations become internalised by the elite.

As he says, we also need to look across countries, and he has presented lots of evidence on the harm austerity has done to the UK economy.

Wednesday, December 31, 2014

'On the Stupidity of Demand Deficient Stagnation'

Simon Wren-Lewis:

On the Stupidity of Demand Deficient Stagnation: In my last post I wrote about “why recessions caused by demand deficiency when inflation is below target are such a scandalous waste. It is a problem that can be easily solved, with lots of winners and no losers. The only reason that this is not obvious to more people is that we have created an institutional divorce between monetary and fiscal policy that obscures that truth.” I suspect I often write stuff that is meaningful to me as a write it but appears obtuse to readers. So this post spells out what I meant. ...

Tuesday, December 16, 2014

How Fiscal Policy Failed During the Great Recession

I have a new column:

How Fiscal Policy Failed During the Great Recession: Fiscal policy failed us during the Great Recession. We did get a fiscal stimulus package shortly after Obama took office, and it helped. But it wasn’t big enough and did not last long enough to make the kind of difference that was needed. Fear of deficits stood in the way, though all the dire predictions that were made about the debt associated with the stimulus package did not come to pass. We could have done so much more. ...

Friday, December 12, 2014

Paul Krugman: Mad as Hellas

What's the real lesson from the troubles in Greece?:

Mad as Hellas, by Paul Krugman, Commentary, NY Times: The Greek fiscal crisis erupted five years ago, and its side effects continue to inflict immense damage on Europe and the world. But I’m not talking about the side effects you may have in mind — spillovers from Greece’s Great Depression-level slump, or financial contagion to other debtors. No, the truly disastrous effect of the Greek crisis was the way it distorted economic policy...
Suddenly, we were supposed to obsess over budget deficits... In reality,... the experience of Greece and other European countries that were forced into harsh austerity measures should ... have convinced you that slashing spending in a depressed economy is a really bad idea... And the devastation in Greece is awesome to behold. ...
The ... news that has roiled Europe these past few days is that the Greeks may have reached their limit. The details are complex, but basically the current government is trying a fairly desperate political maneuver to put off a general election. And, if it fails, the likely winner in that election is Syriza, a party of the left that has demanded a renegotiation of the austerity program, which could lead to a confrontation with Germany and exit from the euro.
The important point here is that it’s not just the Greeks who are mad as Hellas (their own name for their country) and aren’t going to take it anymore. Look at France, where Marine Le Pen, the leader of the anti-immigrant National Front, outpolls mainstream candidates of both right and left. Look at Italy, where about half of voters support radical parties like the Northern League and the Five-Star Movement. Look at Britain, where both anti-immigrant politicians and Scottish separatists are threatening the political order.
It would be a terrible thing if any of these groups — with the exception, surprisingly, of Syriza, which seems relatively benign — were to come to power. But there’s a reason they’re on the rise. This is what happens when an elite claims the right to rule based on its supposed expertise,... then demonstrates both that it does not, in fact, know what it is doing, and that it is too ideologically rigid to learn from its mistakes.
I have no idea how events in Greece are about to turn out. But there’s a real lesson in its political turmoil that’s much more important than the false lesson too many took from its special fiscal woes.

Monday, December 08, 2014

Paul Krugman: Recovery at Last?

Economic recovery from a recession: Obama versus Bush:

Recovery at Last?, by Paul Krugman, Commentary, NY Times: Last week we got an actually good employment report... We’re still nowhere near full employment, but getting there no longer seems like an impossible dream.
And there are some important lessons from this belated good news..., it does put the lie to some of the nonsense you hear about why the economy has lagged.
Let’s talk first about reasons not to celebrate.
Things are finally looking better for American workers, but this improvement comes after years of suffering..., it has been a terrible seven years... Why was it so bad?
You often hear claims, sometimes from pundits who should know better, that nobody predicted a sluggish recovery, and that this proves that mainstream macroeconomics is all wrong. The truth is that many economists, myself included, predicted a slow recovery from the very beginning. Why? ...
We could have had a much faster recovery if the U.S. government had ramped up public investment and put more money in the hands of families likely to spend it. But the Obama stimulus was much too small and short-lived..., and since 2010 what we have actually seen, thanks to scorched-earth Republican opposition on all fronts, are unprecedented cutbacks in government spending, especially investment, and in government employment.
O.K., at this point I’m sure many readers are thinking that they’ve been hearing a very different story about what went wrong — the conservative story that attributes the sluggish recovery to the ... Obama administration. ...
Which is where the new job numbers come in. At this point we have enough data points to compare the job recovery under President Obama with the job recovery under former President George W. Bush, who also presided over a postmodern recession... And by any measure you might choose ... the Obama recovery has been stronger and faster. Oh, and its pace has picked up over the past year, as health reform has gone fully into effect.
Just to be clear, I’m not calling the Obama-era economy a success story. We needed faster job growth ... than under Mr. Bush, because the recession was deeper, and unemployment stayed far too high for far too long. But we can now say with confidence that the recovery’s weakness had nothing to do with Mr. Obama’s (falsely) alleged anti-business slant. What it reflected, instead, was the damage done by government paralysis — paralysis that has, alas, richly rewarded the very politicians who caused it.

Wednesday, November 26, 2014

'Keynes Is Slowly Winning'

[Travel day, so no more until later.]

Paul Krugman:

Keynes Is Slowly Winning: Back in 2010, I had a revelation about just how bad economic policy was about to get; I read the OECD Economic Outlook, which called not just for fiscal austerity but for interest rate hikes — 350 basis points on the Fed funds rate by the end of 2011! — because, well, because.
Now, the OECD is calling for fiscal and monetary stimulus in Europe. ....
It has taken a while. ... But the hawks seem in retreat at the Fed; Mario Draghi ... sounds an awful lot like Janet Yellen; the whole way we’re discussing Japan is very much on Keynesian turf. Three and a half years ago Businessweek was declaring that expansionary austerian Alberto Alesina was the new Keynes; now it tells us that Keynes is the new Keynes. And we have people like Paul Singer complaining about the “Krugmanization” of the debate.
Why does the tide finally seem to be turning? Partly, I think, it’s just a matter of time; after six years it’s becoming hard not to notice that the anti-Keynesians have been wrong about everything. Europe’s slide toward deflation makes it even harder to deny the realities of liquidity-trap economics. And the refusal of almost everyone on the anti-Keynesian side to admit any kind of error has gradually made them look ridiculous.
All of this may be coming too little and too late to avoid policy disaster, especially in Europe. But it’s something to cheer, faintly.

'Understanding George Osborne' or 'Osborne's Idiotic Idea'

Simon Wren-Lewis:

Understanding George Osborne: Yesterday I spoke at the Resolution Foundation’s launch of their analysis of the UK political parties’ fiscal plans post 2015. I believe this analysis shows two things very clearly. First, there is potentially a large gap between the amount of austerity planned by the two major parties. Second, George Osborne’s plans are scarcely credible. They represent a shrinking of the UK state that is unprecedented and which in my view virtually no one wants.  
I would add one other charge - Osborne's plans are illiterate in macroeconomic terms. The UK economy desperately needs more growth. ...
In this situation a Chancellor should not plan to reduce growth further. I have yet to come across a single macroeconomist who argues that Osborne’s plans for renewed austerity will not in themselves reduce aggregate demand. So doing this when the recovery could go much further but is still fragile is just plain dumb. It is even dumber if you have done this once before, in a very similar situation, and the risks I outlined above have indeed materialised.
So why is the Chancellor proposing to make the same mistake twice? ...
I cannot think of any way to rationalise what the Chancellor is planning in macroeconomic terms. But perhaps I’m looking for something that does not exist. Perhaps he does not have a coherent economic framework. Instead he has a clear political framework, which has so far been remarkably successful. The goal is to reduce the size of the state, and because (with his encouragement) mediamacro believes reducing the deficit is the number one priority, he is using deficit reduction as a means to that end. However another priority is to get re-elected, so deficit reduction has to take place at the start of any parliament, so its impact on growth has disappeared by the time of the next election. But this explanation would imply we have a Chancellor that quite cynically puts the welfare of the majority of the UK’s citizens at major risk for ideological and political ends, and I do not think I have ever experienced a UK Chancellor (with possibly one exception) who has done that. But as Sherlock Holmes famously said ...

Chris Dillow:

Osborne's idiotic idea: The FT reports that George Osborne wants to make unicorn farming compulsory:

The new fiscal mandate is expected to enshrine in law one area of common ground between the Tories and Lib Dems: that the cyclically adjusted current deficit should be eliminated by 2017-18.

This is imbecilic. ...

Now, you might think that, in saying all this I'm merely being a Keynesian.

Wrong. In fact, I'm writing in a Hayekian spirit. Hayek famously and correctly argued that economic knowledge was inherently fragmentary and dispersed and so central agencies could not possibly know very much. I'm echoing him. I'm saying that the OBR cannot know enough about the productive potential of millions of firms to know what the output gap is. And it hasn't got enough knowledge of the future to predict recessions.

In presuming otherwise, Osborne is thus not only anti-Keynesian, but anti-Hayekian. I thus agree with Simon - that he is illiterate and plain dumb.

Monday, November 24, 2014

Paul Krugman: Rock Bottom Economics

The era of "rock-bottom economics" is far from over:

Rock Bottom Economics, by Paul Krugman, Commentary, NY Times: Six years ago the Federal Reserve hit rock bottom. It had been cutting the federal funds rate ... more or less frantically in an unsuccessful attempt to get ahead of the recession and financial crisis. But it eventually reached the point where it could cut no more...
Everything changes when the economy is at rock bottom... But for the longest time, nobody with the power to shape policy would believe it.
What do I mean by saying that everything changes? As I wrote..., in a rock-bottom economy “the usual rules of economic policy no longer apply...” Government spending doesn’t compete with private investment — it actually promotes business spending. Central bankers, who normally cultivate an image as stern inflation-fighters, need to do the exact opposite, convincing markets ... that they will push inflation up. “Structural reform,” which usually means making it easier to cut wages, is more likely to destroy jobs than create them.
This may all sound wild and radical, but ... it’s what mainstream economic analysis says will happen once interest rates hit zero. And it’s also what history tells us. ...
But as I said, nobody would believe it. By and large, policymakers and Very Serious People ... went with gut feelings rather than careful economic analysis. ...
Thus we were told ... that budget deficits were our most pressing economic problem, that interest rates would soar ... unless we imposed harsh fiscal austerity... —... demands that we cut government spending now, now, now have cost millions of jobs and deeply damaged our infrastructure.
We were also told repeatedly that printing money ... would lead to “currency debasement and inflation.” The Fed ... stood up to this pressure, but other central banks didn’t. ...
 But... Isn’t the era of rock-bottom economics just about over? Don’t count on it..., the counterintuitive realities of economic policy at the zero lower bound are likely to remain relevant for a long time..., which makes it crucial that influential people understand those realities. Unfortunately, too many still don’t; one of the most striking aspects of economic debate in recent years has been the extent to which those whose economic doctrines have failed the reality test refuse to admit error, let alone learn from it. ...
This bodes ill for the future. What people in power don’t know, or worse what they think they know but isn’t so, can very definitely hurt us.

Wednesday, November 19, 2014

'Fiscal Responsibility Claims Another Victim'

Paul Krugman:

Fiscal Responsibility Claims Another Victim: A few more thoughts on Japan.
The bad growth news shows, pretty clearly, that the consumption tax hike was a big mistake. It also shows, by the way, how weak the market monetarist argument — which is that fiscal policy doesn’t matter, because central banks can always achieve the nominal GDP they want — really is; do you seriously want to contend that Kuroda likes what he sees, that he isn’t trying as hard as he can to boost Japan out of deflation?
Beyond that, the Japanese story is another example of the damage wrought by the rhetoric of fiscal responsibility in a depressed economy.
Leave on one side the expansionary austerity nonsense. Even among relatively sensible people, you often encounter calls for a strategy that couples loose fiscal policy, maybe even stimulus, in the short run with measures to address long-run sustainability. ... But ... the urgency of the stimulus part gets lost, and in fact the practical result is generally austerity even in depression.
So it was with Japan... — the country that has offered many useful lessons to the West, none of which our policymakers have been willing to learn.

Saturday, November 08, 2014

'How Severe Has The Zero Lower Bound Constraint Been?'

Eric Swanson:

How severe has the zero lower bound constraint been?: Summary In December 2008, the Fed lowered the federal funds rate to essentially zero and has kept it there since then. This column argues that, contrary to traditional macroeconomic thinking, monetary policy has not been severely constrained by the zero bound until mid-2011. The results imply that the Fed could have done more to ease monetary policy between 2009 and 2011. These findings could also help explain why the fiscal stimulus package adopted in 2009 did not bring the expected success.

Tuesday, November 04, 2014

'Why Don’t We See More Macroeconomic Populism?'

Paul Krugman has a question:

Why Don’t We See More Macroeconomic Populism?: As I’ve been noting recently, there’s a lot of opposition within Japan to the Bank of Japan’s policy of printing more money; there’s also a lot of pressure on the government to raise taxes. And that’s not really very different from what has been happening in the rest of the advanced world: central banks that have pursued quantitative easing have done so despite political pressure, not because of it, and fiscal austerity has been imposed almost everywhere.
The funny thing is that when you ask for justifications for pursuing hard money and tight budgets in a depressed, low-inflation economy, the answers you get often start from the presumption that money-printing and deficit finance are immensely tempting to politicians, so that you don’t dare let them get even a slight taste of these addictive drugs. This is often said in a tone of great wisdom, and presented as the lesson history teaches us.
Now, as Simon Wren-Lewis points out — and as I’ve pointed out in the past — history actually teaches us no such thing. ...
But ... populist politicians should love it when people tell them that printing money and running big deficits is OK — seems plausible. And things like this have happened in Latin America — indeed are happening again today in Venezuela and Argentina. So why don’t they ever happen in America, Europe, or Japan? Why, in a time of deflationary pressure, have calls for belt-tightening dominated the political scene?
I actually don’t know, although I continue to think about it. But it is a puzzle worth pondering.

Sunday, November 02, 2014

Fighting the Last (Macroeconomic) War

Simon Wren-Lewis:

Fighting the last war: It is often said that generals fight the last war that they have won, even when those tactics are no longer appropriate to the war they are fighting today. The same point has been made about macroeconomic policy: policymakers cannot avoid thinking about the dangers of rising inflation, and in doing so they handicap efforts to fully recover from the Great Recession.
Another military idea is the benefit of using overwhelming force. In the case of inflation we have two legacies of the last war that are designed to prevent inflation reaching the heights of the late 1970s: inflation targets and in many countries independent central banks. Do we need both, or is just one sufficient? I think this question is relevant to the debate over helicopter money (financing deficits by printing money rather than selling debt).
Why are helicopter drops taboo in policy circles? Why is it illegal in the Eurozone? The answer is a fear that if you allow governments access to the printing presses, high inflation will surely follow at some point. ...
I think...: yes, in the grand scheme of things we should worry about inflation and debt, but right now we are worrying about them too much and therefore failing to deal with more pressing concerns.

'The Impact of the Maturity of US Government Debt on Forward Rates and the Term Premium'

At Vox EU:

The impact of the maturity of US government debt on forward rates and the term premium: New results from old data, by Jagjit Chadha: Summary The impact of the stock and maturity of government debt on longer-term bond yields matters for monetary policy. This column assesses the magnitude and relative importance of overall bond supply and maturity effects on longer-term US Treasury interest rates using data from 1976 to 2008. Both factors have a significant impact on both forwards and term premia, but maturity of public debt appears to matter more. The results have implications for exit from unconventional policies, and also for the links between monetary and fiscal policy and debt management.

Saturday, November 01, 2014

'Keynes Was Right'

Anatole Kaletsky:

... It ... seems appropriate to consider what we can learn from all the policy experiments conducted around the world since the 2008 crisis.
The main lesson is that government decisions on taxes and public spending have turned out to be more important as drivers of economic activity than the monetary experiments with zero interest rates and quantitative easing that have dominated media and market attention. ... While every major economy in the world has followed essentially the same monetary policy since 2008, their fiscal policies have been very different and the divergence in outcomes, especially when we compare the United States and Europe, has been exactly the opposite to what was implied by the rhetoric of most politicians and central banks. ...

Thus the six years since 2008 have provided strong empirical support for the supposedly outmoded Keynesian view that government borrowing is more powerful than monetary policy in stimulating severely depressed economies...

More here.

Monday, October 27, 2014

Paul Krugman: Ideology and Investment

What's really behind the GOP's opposition to infrastructure investment?:

Ideology and Investment, by Paul Krugman, Commentary, NY Times: America used to be a country that built for the future. Sometimes the government built directly: Public projects, from the Erie Canal to the Interstate Highway System, provided the backbone for economic growth. Sometimes it provided incentives to the private sector, like land grants to spur railroad construction. Either way, there was broad support for spending that would make us richer.
But nowadays we simply won’t invest, even when the need is obvious and the timing couldn’t be better. And don’t tell me that the problem is “political dysfunction” or some other weasel phrase that diffuses the blame. Our inability to invest doesn’t reflect something wrong with “Washington”; it reflects the destructive ideology that has taken over the Republican Party.
Some background: More than seven years have passed since the housing bubble burst, and ever since, America has been awash in savings ... with nowhere to go. ...
There’s an obvious policy response to this situation: public investment. We have huge infrastructure needs,... and the federal government can borrow incredibly cheaply... So borrowing to build roads, repair sewers and more seems like a no-brainer. But what has actually happened is the reverse. After briefly rising after the Obama stimulus went into effect, public construction spending has plunged. ...
Yet this didn’t have to happen. ... But once the G.O.P. took control of the House, any chance of ... money for infrastructure vanished. Once in a while Republicans would talk about wanting to spend more, but they blocked every Obama administration initiative.
And it’s all about ideology, an overwhelming hostility to government spending of any kind. This hostility began as an attack on social programs, especially those that aid the poor, but over time it has broadened into opposition to any kind of spending, no matter how necessary and no matter what the state of the economy. ... Never mind the obvious point that the private sector doesn’t and won’t supply most kinds of infrastructure, from local roads to sewer systems; such distinctions have been lost amid the chants of private sector good, government bad.
And the result, as I said, is that America has turned its back on its own history. We need public investment; at a time of very low interest rates, we could easily afford it. But build we won’t.

Thursday, October 23, 2014

'The Effects of a Money-Financed Fiscal Stimulus'

Jordi Galí:

The Effects of a Money-Financed Fiscal Stimulus, by Jordi Galí, September 2014: Abstract I analyze the effects of an increase in government purchases financed entirely through seignorage, in both a classical and a New Keynesian framework, and compare them with those resulting from a more conventional debt-financed stimulus. My findings point to the importance of nominal rigidities in shaping those effects. Under a realistic calibration of such rigidities, a money-financed fiscal stimulus is shown to have very strong effects on economic activity, with relatively mild inflationary consequences. If the steady state is sufficiently inefficient, an increase in government purchases may increase welfare even if such spending is wasteful.

Wednesday, October 15, 2014

''The Long-Term Unemployment Rate is NOT 'Sticky' or 'Stubborn'''

Josh Bivens has an adjective quibble:

Adjective Quibble: The Long-Term Unemployment Rate is NOT “Sticky” or “Stubborn”: A Wall Street Journal blog post this morning describes an Obama administration initiative to combat long-term unemployment. In the opening sentence, the author follows a too-common convention in describing the long-term unemployment rate as “sticky.” Sometimes the adjective is “stubborn.”
I know that this will sound like quibbling, but in this case adjectives really matter for understanding the problem. As a paper I co-wrote shows pretty clearly, the long-term unemployment rate (LTUR) has not been sticky or stubborn for years. In fact, the LTUR has fallen faster than one would expect given the overall pace of labor market improvement. It is true that the LTUR remains too high, but that is because it skyrocketed during the Great Recession and in the six months after its official end. But the LTUR has since then not become resistant to wider labor market improvement.
The concrete policy implication of recognizing this is that by far the most important thing that can be done to lower the still too-high LTUR is to maintain support for economic recovery more broadly. In today’s far too narrow macroeconomic policy debate, this simply means the Fed should not boost short-term interest rates until the labor market is much, much healthier (including a much lower LTUR). ...

And it's still far from too late for fiscal policy -- infrastructure spending for example -- to make a difference. But don't get your hopes up...

'Urgent Need to Boost Demand in the Eurozone'

Biagio Bossone and Richard Wood

To G-20 Leaders: Urgent Need to Boost Demand in the Eurozone: The economies in the Eurozone are continuing to slide into recession and depression.  Senior officials of G-20 countries (including those in Australia, the host government) have not understood, or anticipated, that the Eurozone crisis is a major threat to global recovery. The officials have provided sub-standard advice to their leaders.  The deepening crisis must be addressed.  This article identifies a strong monetary/fiscal policy combination that could boost consumer and aggregate demand, and simultaneously address high public debt burdens and deflation.

Paul Krugman:

1937: From the beginning, economists who had studied the Great Depression warned that policy makers needed, above all, to be careful not to pull another 1937 — a reference to the fateful year when FDR prematurely tried to balance the budget and the Fed prematurely tried to normalize monetary policy, aborting the recovery of the previous four years and sending the economy on another big downward slope.
Unfortunately, these warnings were ignored. ... And now things are sliding everywhere. Actually, Europe already had one 1937, with its slide into a double-dip recession; but now it’s very much looking like another. And the world economy as a whole is weakening fast. ...
I hope that the Fed will stop talking about exit strategies for a while. We are by no means out of the Lesser Depression.

Update: See also The Depressing Signals the Markets Are Sending About the Global Economy -

'Three Hours of Life per Euro'

Public spending increased life expectancy in eastern Germany:

Three hours of life per euro, EurekAlert: Public spending appears to have contributed substantially to the fact that life expectancy in eastern Germany has not only increased, but is now almost equivalent to life expectancy in the west. While the possible connection of public spending and life expectancy has been a matter of debate, scientists at the Max Planck Institute for Demographic Research (MPIDR) have now for the first time quantified the effect. They found that for each additional euro the eastern Germans received in benefits from pensions and public health insurance after reunification, they gained on average three hours of life expectancy per person per year.
These are the conclusions of an analysis based on a newly developed set of age-specific data on public expenditures through the year 2000. MPIDR demographer Tobias Vogt published the results of the analysis recently in the scientific journal Journal of the Economics of Ageing. ...
"What has often been called an explosion in social spending in the wake of reunification has, however, led to a gratifying jump in life expectancy," says Tobias Vogt. ...
Additional expenditures by the health care system were found to have had a greater impact on life expectancy than higher pensions... However, Vogt observed, "without the pension payments of citizens in east and west converging to equivalent levels, the gap in life expectancy could not have been closed." This is because when there are no differences in the quality and level of medical care, the standard of living becomes the decisive factor in life expectancy. And the standard of living of older people is determined to a large extent by the size of their pensions. ...

Friday, October 03, 2014

Thinking the Unthinkable: The Effects of a Money-Financed Fiscal Stimulus

Jordi Gali:

Thinking the Unthinkable: The Effects of a Money-Financed Fiscal Stimulus, by Jordi Galí, Vox EU: Many unconventional policies adopted by central banks in response to the Crisis failed to boost the economy. This column discusses the effects of a temporary money-financed fiscal stimulus. When a more realistic model is allowed, such a stimulus can have a strong effect on output and employment, and a mild effect on inflation. 

He ends with:

The time may have come to leave old prejudices behind and come to terms with the urgent need to increase aggregate demand in a more foolproof way than tried up to now, especially in the Eurozone. The option of a money-financed fiscal stimulus should be considered seriously.

Wednesday, October 01, 2014

The Contribution of Fiscal Policy to Real GDP Growth


[From Brookings]

The fiscal impact measure shows how much federal, state, and local government taxes and spending added to or subtracted from the overall pace of economic growth. Between 2008 and 2011, fiscal impact was positive, indicating that government policy was stimulative; in recent years, it has been negative, indicating restraint. (For more detail on how this measure was constructed and how to interpret it, see our methodology.)

The Unemployment Rate is an 'Inadequate Measure of Slack'

Jared Bernstein says there's more slack in the labor market than you'd think from just looking at the unemployment rate:

...So why not just look at the unemployment rate and call it a day? Because special factors in play right now make the jobless rate an inadequate measure of slack. In fact, at 6.1 percent last month, it’s within spitting distance of the rate many economists consider to be consistent with full employment, about 5.5 percent (I think that’s too high, but that’s a different argument).
There are at least two special factors that are distorting the unemployment rate’s signal. First, there are over seven million involuntary part-time workers, almost 5 percent of the labor force, who want, but can’t find, full-time jobs. That’s still up two percentage points from its pre-recession trough. Importantly, the unemployment rate doesn’t capture this dimension of slack at all...
The second special factor masking the extent of slack as measured by unemployment has to do with participation in the labor force. Once you give up looking for work, you’re no longer counted in the unemployment rate, so if a bunch of people exit the labor force because of the very slack we’re trying to measure, it artificially lowers unemployment, making a weak labor market look better.
That’s certainly happened over the recession and throughout the recovery...

There's still plenty of room, and plenty of time for fiscal policymakers to do more to help the unemployed (and with infrastructure, our future economic growth at the same time). Unfortunately, Congress has been captured by other interests. As for monetary policy, let's hope that the FOMC listens to Charles Evans' call for patience. Raising rates too late and risking a temporary outbreak of inflation is far less of a mistake than raising them too early and slowing the recovery of employment. And there's this too: Unemployment Hurts Happiness More Than Modest Inflation.

Tuesday, September 30, 2014

'Why Have Policymakers Abandoned the Working Class?'

I have a new column:

Why Have Policymakers Abandoned the Working Class?, by Mark Thoma: The risks associated with a negative economic shock can vary widely depending on the wealth of a household. Wealthy households can, of course, absorb a shock much easier than poorer households. Thus, it’s important to think about how economic downturns impact various groups within the economy, and how policy can be used to offset the problems experienced by the most vulnerable among us.
When thinking about the effects of an increase in the Fed’s target interest rate, for example, it’s important to consider the impacts across income groups. I was very pleased to hear monetary policymakers talk about the asymmetric risks associated with increasing the interest rate too soon and slowing the recovery of employment and output, versus raising rates too late and risking inflation. ...
But there is more to it than this. ...

Tuesday, September 02, 2014

Objections to Fiscal Policy are Groundless—It Works

I have a new column:

Objections to Fiscal Policy are Groundless—It Works: One of the more controversial policies instituted in an attempt to stimulate the economy out of the Great Recession was the $816.3 billion fiscal stimulus package enacted just after Obama took office. ...

[The artwork is a bit mixed up, it has Keynes in a helicopter dropping money...]

How to Shock the U.S. Economy Back to Life

At MoneyWatch:

How to shock the U.S. economy back to life, by Mark Thoma: During the Great Recession, U.S. gross domestic production -- the nation's total output of goods and services -- dropped below the trend rate of growth that prevailed before the collapse. More than five years into the recovery, the economy shows no signs of returning to that prior rate of growth.
Instead, as the following graph shows, although the economy is growing at roughly the same rate as before the crisis, the growth is from a much lower level of output:
Is this the "new normal" we hear so much about? Do Americans have no choice but to accept the lower level of output, and the lower level of employment and living standards that comes with it, or is there something we can do to push the economy back to the pre-Great Recession trend? ...[continue]...

Friday, August 29, 2014

Paul Krugman: The Fall of France

Why didn't François Hollande reverse austerity policies in France?:

The Fall of France, by Paul Krugman, Commentary, NY Times: François Hollande, the president of France since 2012, coulda been a contender. He was elected on a promise to turn away from the austerity policies that killed Europe’s brief, inadequate economic recovery... But it was not to be. Once in office, Mr. Hollande promptly folded, giving in completely to demands for even more austerity.
Let it not be said, however, that he is entirely spineless. Earlier this week, he took decisive action, but not, alas, on economic policy... Mr. Hollande ... was focused on purging members of his government daring to question his subservience to Berlin and Brussels.
It’s a remarkable spectacle. To fully appreciate it, however, you need to understand two things. First, Europe, as a whole, is in deep trouble. Second,... France’s performance is much better than you would guess from news reports. France isn’t Greece; it isn’t even Italy. But it is letting itself be bullied as if it were a basket case. ...
Why ... does France get such bad press? It’s hard to escape the suspicion that it’s political: France has a big government and a generous welfare state, which free-market ideology says should lead to economic disaster. So disaster is what gets reported, even if it’s not what the numbers say.
And Mr. Hollande, even though he leads France’s Socialist Party, appears to believe this ideologically motivated bad-mouthing. Worse, he has fallen into a vicious circle in which austerity policies cause growth to stall, and this stalled growth is taken as evidence that France needs even more austerity.
It’s a very sad story, and not just for France.
Most immediately, Europe’s economy is in dire straits. ... Meanwhile, Germany is incorrigible. Its official response to the shake-up in France was a declaration that “there is no contradiction between consolidation and growth” — hey, never mind the experience of the past four years, we still believe that austerity is expansionary.
So Europe desperately needs the leader of a major economy — one that is not in terrible shape — to stand up and say that austerity is killing the Continent’s economic prospects. Mr. Hollande could and should have been that leader, but he isn’t.
And if the European economy continues to stagnate or worse, what will become of the European project — the long-term effort to secure peace and democracy through shared prosperity? In failing France, Mr. Hollande is also failing Europe as a whole — and nobody knows how bad it might get.

Wednesday, August 27, 2014

Filling the Gap: Monetary Policy or Tax Cuts or Government Spending?

Simon Wren-Lewis (a bit technical):

Filling the gap: monetary policy or tax cuts or government spending: Suppose there is a shortfall in aggregate demand associated with a rise in involuntary unemployment in a simple closed economy with no capital. Do we try and raise private consumption (C) or government consumption (G)? If the former, why do we prefer to use monetary policy rather than tax cuts? ...

Monday, August 18, 2014

'Balanced-Budget Fundamentalism'

Simon Wren-Lewis:

Balanced-budget fundamentalism: Europeans, and particularly the European elite, find popular attitudes to science among many across the Atlantic both amusing and distressing. In Europe we do not have regular attempts to replace evolution with ‘intelligent design’ on school curriculums. Climate change denial is not mainstream politics in Europe as it is in the US (with the possible exception of the UK). Yet Europe, and particularly its governing elite, seems gripped by a belief that is as unscientific and more immediately dangerous. It is a belief that fiscal policy should be tightened in a liquidity trap. In the UK economic growth is currently strong, but that cannot disguise the fact that this has been the slowest recovery from a recession for centuries. Austerity may not be the main cause of that, but it certainly played its part. Yet the government that undertook this austerity, instead of trying to distract attention from its mistake, is planning to do it all over again. Either this is a serious intention, or a ruse to help win an election, but either way it suggests events have not dulled its faith in this doctrine. ...

Sunday, August 17, 2014

'The Treasury and the Fed are at Loggerheads'

Roger Farmer:

...How successful was operation twist at changing the maturity structure of Treasury securities held by the public? ...I break down Treasuries held by the public as a fraction of total debt outstanding. This ... shows that although the Fed switched its holdings from yields of three months to two years to yields in the two to ten year range (Figure 3) this operation was swamped, after November of 2008, by Treasury operations that increased the supply of maturities in the two to ten year range (Figure 4).  The end result was that the public ended up holding more of these two to ten year bonds in 2010 than before the recession hit.
Could we have a little coordination here guys?

Friday, August 15, 2014

Paul Krugman: The Forever Slump

The risks from tightening policy too soon are much greater than the risks from leaving policy in place too long:

The Forever Slump, by Paul Krugman, Commentary, NY Times: It’s hard to believe, but almost six years have passed since the fall of Lehman Brothers ushered in the worst economic crisis since the 1930s. ... Recovery is far from complete, and the wrong policies could still turn economic weakness into a more or less permanent depression.
In fact, that’s what seems to be happening in Europe as we speak. And the rest of us should learn from Europe’s experience. ...
European officials eagerly embraced now-discredited doctrines that allegedly justified fiscal austerity even in depressed economies (although America has de facto done a lot of austerity, too, thanks to the sequester and cuts at the state and local level). And the European Central Bank, or E.C.B., not only failed to match the Fed’s asset purchases, it actually raised interest rates back in 2011 to head off the imaginary risk of inflation.
The E.C.B. reversed course when Europe slid back into recession, and, as I’ve already mentioned, under Mario Draghi’s leadership, it did a lot to alleviate the European debt crisis. But this wasn’t enough. ...
And now growth has stalled, while inflation has fallen far below the E.C.B.’s target of 2 percent, and prices are actually falling in debtor nations. It’s really a dismal picture. ... Europe will arguably be lucky if all it experiences is one lost decade.
The good news is that things don’t look that dire in America, where job creation seems finally to have picked up and the threat of deflation has receded, at least for now. But all it would take is a few bad shocks and/or policy missteps to send us down the same path.
The good news is that Janet Yellen, the Fed chairwoman, understands the danger; she has made it clear that she would rather take the chance of a temporary rise in the inflation rate than risk hitting the brakes too soon, the way the E.C.B. did in 2011. The bad news is that she and her colleagues are under a lot of pressure to do the wrong thing from [those] who seem to have learned nothing from being wrong year after year, and are still agitating for higher rates.
There’s an old joke about the man who decides to cheer up, because things could be worse — and sure enough, things get worse. That’s more or less what happened to Europe, and we shouldn’t let it happen here.