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…Brad Delong has it:
In 20 years, historians will interview the then-aged monetary, banking, and fiscal policymakers of the 2000’s. They will ask them why they did not take more aggressive steps to return nominal incomes and demand to trend levels when they were sitting in the hot seats. I already wonder what their excuses will be.
I don’t care much for what the fiscal policymakers will have to say…I’ll be largely interested in the state of monetary policy-making in 20 years, and how our crisis will look through that future lens. Will this chart haunt our current monetary policymakers’ future nightmares?
From Brad Delong:
Hey! Obama! Recess-Appoint Somebody to Kevin Warsh’s and to Peter Diamond’s Seats on the Federal Reserve Board Already!
I recommend Joe Gagnon and Christie Romer. But any of a huge number of people would be good…
Joe Gagnon is famous in the mainstream for his proposal to buy $2 trillion in Treasury debt (7-year average portfolio maturity, I believe). The problem with this plan (to the point that it is a problem, relative to baseline) is that it stipulates a quantity. $2 trillion may be (or have been) enough to raise NGDP expectations to a level consistent with rapid recovery (i.e. forcing real interest rates negative)…but then again, it may not be (or have been). In my mind, there is no reason to engage in quantitative targets such as these, unless you’re looking to put yourself in handcuffs. It would be a wonderful world indeed if this was the press report from the Federal Reserve:
The Board unanimously concurred that the economy is at the beginning stages of recovery, but such a recovery remains fragile. The debt problems in the EU, as well as the unfolding disasters in Japan highlight a renewed demand for dollar-denominated debt. The Fed intends to fully accommodate this increased money demand by engaging in the purchase of Treasury securities until such time that expected NGDP growth is on target at the board’s long-run growth rate of 5%, plus 2% for the following two years. The Fed will be monitoring money demand and credit conditions, and adjusting policy accordingly to return to, and remain on, trajectory.
Will the Fed need to buy $2 trillion in securities…or even the entire national debt? I don’t know. That’s not the target. The target is the previous trend level of NGDP. As an analogy, do you need to fill *random swimming pool here* with 500 gallons of water? Oh, can’t answer because I didn’t give you the dimensions of the pool?! Better fill it with water until it’s full then…
One thing I had the class read was Ben Bernanke’s 2002 paper on self-induced paralysis in Japan and all the things they should’ve been doing. My reaction to it was, ‘I wish Ben would read this again.’ It was a shame to do a round of quantitative easing and put a number on it. Why not just do it until it helped the economy? That’s how you get the real expectations effect. So I would’ve made the quantitative easing bigger.
More radically, they could go to a price-level target, which would allow inflation to be higher than the target for a few years in order to compensate for the past few years, when it’s been lower than the target.
While we’re at it, Scott Sumner and Paul Krugman would be excellent recess appointments, as well.
Think of any others, and why? List them in the comments!
P.S. For the record, I actually do have a strong inclination that the Fed wouldn’t have to purchase all outstanding Treasury debt.
Krugman is always alert to the possibility of the extreme. “When things go crazy, my instinct is to go radical on policy.”
Better monetary policy than fiscal policy, in my mind. Get him out of the Times and into the Fed!
I don’t think he is. I enjoyed his book, “The Big Questions”, and I even made a set of desktop images for him, which (if you’d like) I can send you the full sized images and you can use them for free if you enjoy them (p.s. I also do design work)!
The only thing I find wrong is the fact that you can’t do economics from accounting identities. If you could, then Steven’s basic model would be correct, as a matter of arithmetic, and a matter of reality. To my mind, that is where you stop.
Start with GDP: Y = C + G + I + Nx. I think we can probably disregard Nx to make the model easier. In this case, consumption is constant, as the assumption is that our idle millionaire consumes zero at $84 million, and you can’t consume less than zero (even when dead!). In this case, we’ll hold C constant at $100. Now say G is currently 0, but the government sees a nice pile of money, maybe $84 million, sitting around in a bank account. Well, that money isn’t just sitting there, S (savings) is related to I in our GDP model! So assuming a quick 1:1 relationship between S and I, what the government is doing, in order consume $84 is reducing investment by $84. Assuming there is some sort of relationship between I and C, than in future periods, C will have to be reduced by a cumulative total of $84.
Of course, none of that is literally true. As I (and Noah) said before, doing economics from accounting identities leads to patently absurd conclusions. There are no concrete relationships between savings and investment. They are both dependent variables. Neither is there a concrete relationship between I and C. Both depend on other economic variables, as well. But, zero-sum accounting would get you this result.
But I think there is a deeper fallacy that Landsburg’s experiment falls into, and that is the myth of government as consumer. It is very common to hear in right-wing (usually non-economist) circles that the private sector produces wealth, and that the government produces nothing, it only consumes wealth that is generated in the private sector. The fact is that the state produces the exact same amount of wealth as the market. That is none at all.
The fact is people produce wealth, and people consume wealth. The state and the market are simply institutions which people have arranged to coordinate production and consumption. The socialist calculation debate was not regarding how the state stole wealth from the market, it was regarding the limitations of the state as an institution for coordinating economic activity. Corporations in-and-of themselves do not produce any wealth, either. The organization of a corporation is wealth enhancing, but that is only to the point that it is more efficient than other such arrangements that bring people together to produce and consume.
Per James Buchanan’s excellent analysis [JSTOR] of the political economy, the (tax and spend*) state is largely concerned with providing club goods, that is: goods that are largely non-rival, and at least partially non-excludable. So to assume away transaction costs, deadweight loss, and the like…in this simple model, a society is choosing to purchase some goods as the “club of everyone”, instead of as individuals. Consumption increases when the government steals “idle millionaire’s” money, and doesn’t decrease at all (assuming no effect on I, or rather, that he government’s investment produced a form of capital to substitute for direct savings) because the types of goods provided by the “club of everyone” wouldn’t necessarily be purchased by the individual, but individuals are (presumably) wealthier for having them.
Brad DeLong is actually correct (and this fallacy is what he is pointing out in his post, although he doesn’t explicitly state it). “We” are the state. Arnold Kling is also correct, “lose the we”…the catch is that he just wants a different arrangement of the provision of club goods. Kling is re-stating Milton Friedman’s sentiment when he said (paraphrasing), “I’ve never seen a tax cut I didn’t like”. Friedman was stating a preference for institutional arrangements, not a statement about consumption.
Note: This isn’t an argument that allows the government to run roughshod over “idle millions” sitting around. Our capital stock does determine investment in the long run. Savings do have a role in the economy. In a hypothetical situation, if the government can get a higher ROI from stealing a millionaire’s money from under his mattress, then society is richer. But if not; if the government simply determines that government mattresses are where money goes, society is no worse off, and if the government consumes goods or invests the money in a ridiculous fashion, then society is worse off.
*I specifically point to the tax and spend state because the “tax to finance regulations” state is a completely different animal. And so you can see how you can get mislead by simple accounting identities!
Brad Delong got me interested in the details of a few of these cases
You can sleep easy if you play by the rules even if you think the rules are non-optimal, as long as you point that out. That’s Milton Friedman.
You cannot sleep easy if you play by the rules if you think the rules give you a license to steal. That’s Robert Nozick, Robert Bork, and Ayn Rand.
That’s the difference between utilitarian and deontological theories. Deontology is a bitch.
To catch up, Robert Nozick freely entered into a lease with his landlord, Eric Segal. After living in apartment for a year or so, Nozick then sued Segal for violating rent control laws and further refused to move out unless paid additional compensation. According to his moral theories this constituted extortion.
Ayn Rand, received Social Security and possible Medicare payments to cover lung cancer treatment. This is despite her characterization of the welfare state as theft and a particularly egregious form of theft because it is legal.
Robert Bork sued the Yale Club after suffer a slip and fall, despite arguing against frivolous lawsuits. I couldn’t find enough information on Bork – in the short time I looked – to get a real sense of his moral philosophy concerning slip and falls.
For Nozick and Rand, however, these are clear breaches of the most common interpretations of their moral philosophy. Does this undermine their philosophy at all?
On one level we are of course tempted to say, no what is true is true regardless of whether the popularizer of those truths honors them. On the other hand “ought” implies “can.” If not even Nozick and Rand can hold to these principles are they a meaningful guide to how we ought to structure our society? While these are by no means view-killing breaches, they do raise the question: is anyone capable of living according to these maxims?
I looked a little in Nozick and Rand’s response. By my reading Nozick’s offers a fair degree of absolution for his philosophy while Rand’s leaves me scratching my head.
Nozick via Julian Sanchez
I knew at the time that when I let my intense irritation with representatives of Erich Segal lead me to invoke against him rent control laws that I opposed and disapproved of, that I would later come to regret it, but sometimes you have to do what you have to do.
This reads to me as this: Yes, what I did was wrong. I knew it at the time, but I was pissed.
This statement moves the onus from the philosophy to the individual. Had Nozick dithered and said “Well, but Segal deserved it” that would be different. Instead, he seems to admit that he acted immorally.
Said another way, its one thing to abandon your principles you when find that they are inconvenient to you. It’s another to fall victim to weakness of will and do something you know you will later regret. We don’t have any philosophy, save perhaps hedonism, that protects people from weakness of will.
Rand on the other hand claimed
It is obvious, in such cases, that a man receives his own money which was taken from him by force, directly and specifically, without his consent, against his own choice. Those who advocated such laws are morally guilty, since they assumed the “right” to force employers and unwilling co-workers. But the victims, who opposed such laws, have a clear right to any refund of their own money—and they would not advance the cause of freedom if they left their money, unclaimed, for the benefit of the welfare-state administration.
This is much iffier. Here she does seem to be saying that different rules apply to her followers simply because they are her followers. This has the feel of ad hocery. There might be significantly more, but it seems to be a more eloquent way of saying “We were just sticking it to the man, that was sticking it to us.”
Doesn’t the taking of benefits imply that more resources will have to be confiscated to support the program? And, while appealing for a refund makes perfect sense, simply using the system without a guarantee that you are matching funds put-in with funds taken-out and certainly without the express permission of the people who are currently being taxed seems morally ambiguous in Rand’s own terms.