Mohamed A. El-Erian; Fed Rate Hike: Powell Tries to Balance Growth and Volatility

Fed Rate Hike Powell Tries to Balance Growth and Volatility Bloomberg

If the Fed had had a 4%/year inflation target for the past decade, odds are that right now the Federal Reserve would be in a situation without great workers. But it hasn’t, and it isn’t: Mohamed A. El-Erian: Fed Rate Hike: Powell Tries to Balance Growth and Volatility: “Fed’s No-Win…. Powell increasingly must make the best of factors mostly outside his control, increasing fears of a policy mistake…

>…It has become customary for new central bank chiefs to be tested early in their tenure. In Powell’s case, the challenge has taken the form of a controversial policy decision due to the competing pull of domestic economic conditions and the combination of technical market fragility and a slowing international economy. This tug-of-war is unlikely to end any time soon…

#shouldread #monetarypolicy 

Fairly Recently: Must- and Should-Reads, and Writings… (December 18, 2018)


  1. Hoisted from the Archives: The Democrats’ Deficit Line in the Sand: From ten years ago…. A chain is only as strong as its weakest link, and it seems pointless to work to strengthen the Democratic links of the chain of fiscal responsibility when the Republican links are not just weak but absent…

  2. Hoisted from the Archives: An Unrealistic, Impractical, Utopian Plan for Dealing with the Health Care Opportunity of 2007: Think of it as a utopia—and think of it as a utopia coming from a guy who is not a real health economist but has an undeserved reputation because he was good at translating the economese spoken by real health economists like David Cutler, Sherry Glied, Ken Thorpe, Len Nichols, et cetera in a way that made it intelligible to senior Bentsen aides like Marina Weiss and Michael Levy…

  3. Comment of the Day: Charles Steindel: Weekend Reading: Paul Krugman (2011): Mr Keynes and the Moderns: When I was in grad school in the ’70s it was tacitly taught that the ‘General’ in the title was essentially Keynes’ marketing—what we think of as ‘Keynesian’ economics was really a special, not general, case…. 2008 taught me otherwise…. Zero rigidities means something like absolutely continuous wage and price setting. That is the extraordinarily “special” case, not the existence of normal human behavior…

  4. Weekend Reading: David Brooks (2003): The Collapse of the Dream Palaces: It still amazes me that David Brooks has a paying job…

  1. Jon Schwarz: The 10 Most Awful Articles in the Weekly Standard’s Short Life I: “‘The Collapse of the Dream Palaces’ by David Brooks, 2003. The top four places on this list rightfully belong to the Weekly Standard’s voluble case for, and defense of, the Iraq War. And this David Brooks article is unquestionably the most horrifying of them all…. What you may find is that it makes you feel as though a sweaty, middle-aged man is pointing a gun at you and fervently explaining that people like you who wear red shirts are human scum and you, all of you, are about to get what’s coming to you, at last. Then you look down and notice you are not wearing a red shirt, but the man with the gun is. When you’re finished reading the piece, remember that this was published just five months before the New York Times hired David Brooks as an op-ed writer. In other words, the Times saw this gibbering, so disconnected from reality it is functionally insane, and thought: This is exactly who we want explaining the world to our readers… #journamalism #orangehairedbaboons #moralresponsibility

  2. Driftglass99 (2010): David F. Brooks Lying:

  3. Claudio Borio, Mathias Drehmann and Dora Xia: The Financial Cycle and Recession Risk: “Financial cycle booms can end in crises and, even if they do not, they tend to weaken growth. Given their slow build-up, do they convey information about recession risk? We compare the predictive performance of different financial cycle proxies with that of the term spread – a popular recession indicator. In contrast to much of the literature, our analysis covers a large sample of advanced and emerging market economies. We find that, in general, financial cycle measures provide valuable information and tend to outperform the term spread…

  4. Wikipedia: Colorado College

  5. The problem is that British politics is already poisoned by a “leave” campaign carried out by lying liars, and it will be further poisoned by the disruption that Brexit will generate, and by the natural tendency to blame future disruption that Brexit did not generate on Brexit: Robert Skidelsky: The Continuing Agony of Brexit: “It is playing with fire to seek a second vote on the ground that you did not like the result of the first one. And there’s one further issue to bear in mind: Leavers detest the EU more intensely than Remainers love it. If the Remainers win a second vote, a passionate resentment will sour British politics for years. So we must hope that May gets her amicable divorce when Parliament finally votes on it in January… #orangehairedbaboons #brexit #neofascism

  6. Interesting euphemisms in this twitter thread from the very sharp but strangely blinkered Geoff Kabaservice… Kabaservice sees conservative political energy back in the age of Nixon-Ford-Carter-Reagan coming from “liberal overreach and failure” on “crime, foreign policy, and the economy” plus “outraged public opinion” because of liberals’ policies on “busing, affirmative action, welfare, and feminism”. Jonathan Chait parries that the energy for conservatives’ 1980s victories was racial—that it was no accident that Reagan started his campaign in Philadelphia, MS, and there did not say what he did not say—that “conservatism was always and everywhere thoroughly racist, morally bankrupt, and populated with hypocrites and authoritarians”. Kabaservice’s response? That he rejects Chait’s formulation and “prefer[s Charles Sykes’s]… ‘recessive gene’ theory”. But the conservative whom Sykes holds up as “marginaliz[ing] those uglier voices on the right” is… William F. Buckley. William Fracking “The White community in the South is entitled to take such measures as are necessary to prevail, politically and culturally, in areas in which it does not predominate numerically” Buckley. Buckley does not say that measures then used to maintain white supremacy like lynching Blacks who try to vote and shooting civil rights activists in the head are “necessary to prevail”. But he does not say that they are not necessary either. There was a pre-Barry Goldwater pre-James Buchanan smaller-government more-entrepreneurship Republicanism that did not try to harness racial animosity to the task of curbing the New Deal, and did not think that the right to discriminate against Black people was an important right that needed to be safeguarded from an overreaching federal government. Kabaservice needs to reach back to a Teddy Roosevelt who was eager to invite a Booker T. Washington to dinner at the White House—not to a Ronald Reagan who takes his lines and directions from Lee Atwater and company—if he wants to see clearly what needs to be done: Geoff Kabaservice: “How should the left think about the right? The past week brought 4 examples of different approaches. Start with George Packer’s historical overview…. Packer’s… correct that the actions of the GOP-controlled state legislatures in MI & WI are textbook political corruption and a disgrace to US democracy, as well as further confirmation that Scott Walker has always been toxic. He’s also correct that the GOP acts this way because it’s the product of an ideological movement rather than traditional coalition-based politics…

  7. Jonathan Chait (2012): How the GOP Destroyed its Moderates: “Moderates… do continue to exist in the Republican Party. They merely do not exercise power…. They provide off-the-record quotations to reporters, expressing unease over whichever radical turn the party has taken at any given moment. They can be found in Washington and elsewhere rolling their eyes at their colleagues. The odd figure with nothing left to lose—say, a senator who has lost a primary challenge—may even deliver a forceful assault on the party’s uncompromising direction. For the most part, though, Republican moderation is a kind of secret creed, a freemasonry of the right. It lacks institutions that might legitimize it, or even a language to express itself…

  8. Martha Wells: The Future of Work: Compulsory: “IT’S NOT LIKE I haven’t thought about killing the humans since I hacked my governor module. But then I started exploring the company servers and discovered hundreds of hours of downloadable entertainment media, and I figured, what’s the hurry? I can always kill the humans after the next series ends. Even the humans think about killing the humans, especially here. I hate mines, and mining, and humans who work in mining, and of all the stupid mines I can remember, I hate this stupid mine the most. But the humans hate it more…

  9. Anna Cieslak and Annette Vissing-Jorgensen: The Economics of the Fed Put: “Low stock market returns predict accommodating monetary policy by the Federal Reserve…. a more powerful predictor of subsequent federal funds target rate changes than almost all macroeconomic news releases…. Stock returns cause Fed policy…

  10. Jacob Heilbrunn: ‘The Weekly Standard’: A Record of Failed Regime Change: “For most neocons, however, journalism has never been more than a Leninist means to an end—to form an intellectual vanguard…. Kristol, Podhoretz, Boot, and others belong to a second generation of neocons that never drifted away from the Democrats toward the Republican Party. Instead, they were right from the beginning…. Many seem simply politically adrift, like Russian exiles stranded in Paris after the Bolshevik revolution pining for the ancien régime.  A conference attended by about a hundred people last week at the Niskanen Center, a small think tank located near Capitol Hill, offered a timely reminder of their losses…

  11. Gillian Brunet: Stimulus on the Home Front: The State-Level Effects of WWII Spending: “WWII is viewed as the quintessential example of fiscal stimulus and exerts an outsized influence on fiscal multiplier estimates, but the wartime economy was highly unusual…

  12. The very sharp Simon Wren-Lewis lives in a Manichean world: good academic economists, bad “City” economists, and bad journalists who do not know or perhaps do not care to highlight the difference. The problem is that here in America we have not a lot of but we do have influential academic economists who manage to neutralize the voice of those who know what they are talking about: Simon Wren-Lewis: Experts and Elites: “The view of the overwhelming majority academic economists that Brexit will be harmful is going to be ignored by many…. The neoliberal right has had an interest in discrediting economic expertise, and replacing academic economists with City economists in positions of influence…. Right wing think tanks like the IEA are particularly useful in this respect…. Just look at how the media began to treat climate change as controversial…

  13. John Authers: Ferreting Out Three Fed Rate Scenarios: “Jerome Powell and his colleagues at the Federal Reserve are about to give us the last big market event of the year, with what will almost certainly be a fourth interest-rate rise, followed by what should be a fascinating press conference to explain it. Barring a major (and unpleasant) surprise, the central bank chairman will suggest that rates won’t be rising all that fast next year…. Meanwhile, the agonies for banks in the euro zone grow ever worse. The new reason for their problems, which have happened even though the European Central Bank, unlike the Fed, is still engaged in QE, seems to be a shortage of dollars. This is partly because of the Fed…

Weekend Reading: David Brooks (2003): The Collapse of the Dream Palaces

Clowns (ICP)

It still amazes me that David Brooks has a paying job: David Brooks (April 28, 2003): The Collapse of the Dream Palaces: “GEORGE ORWELL was a genuinely modest man. But he knew he had a talent for facing unpleasant facts. That doesn’t seem at first glance like much of a gift. But when one looks around the world, one quickly sees how rare it is…

…Most people nurture the facts that confirm their worldview and ignore or marginalize the ones that don’t, unable to achieve enough emotional detachment from their own political passions to see the world as it really is. Now that the war in Iraq is over, we’ll find out how many people around the world are capable of facing unpleasant facts.

For the events of recent months confirm that millions of human beings are living in dream palaces, to use Fouad Ajami’s phrase.

They are living with versions of reality that simply do not comport with the way things are. They circulate and recirculate conspiracy theories, myths, and allegations with little regard for whether or not these fantasies are true. And the events of the past month have exposed them as the falsehoods they are.

There is first the dream palace of the Arabists: In this dream palace, it is always the twelfth century, and every Western incursion into the Middle East is a Crusade. The Americans are always invaders and occupiers. In this dream palace, any Arab who hates America is a defender of Arab honor, so Osama bin Laden becomes an Arab Joe Louis, and Saddam Hussein, who probably killed more Muslims than any other person in the history of the world, becomes the champion of the Muslim cause.

In this dream palace, the problems of the Arab world are never the Arabs’ fault. It is always the Jews, the Zionists, the Americans, and the imperialists who are to blame. This palace reeks of conspiracies—of Israelis who blew up the World Trade Center, of Jews who put the blood of Muslim children in their pastries, of Americans who fake images of Iraqis celebrating in Baghdad in order to fool the world. In this palace, Mohammed Saeed al-Sahaf, the Iraqi information minister, was taken seriously because he told the Arabists what they wanted to hear.

In this palace, old men really do shoot down Apache helicopters with AK-47s. Saddam’s torture chambers are invisible, the hundreds of thousands of Iraqis he murdered go unmentioned, the fedayeen who shot their own refugees are ignored, but every civilian casualty caused by an American bomb is displayed in all its bloody agony.

In this dream palace, rage is always the proper emotion, victimhood the pleasure most indulged. Other people—Iraqis, Palestinians, suicide bombers—are always called upon to fight the infidels to the death so that the satellite TV-watching Arabists, safe in their living rooms, can have something to cheer about.

Then there is the dream palace of the Europeans: In this palace, America is a bigger threat to world peace than Saddam Hussein. America is the land of rotting cities, the electric chair, serial killers, gun-crazed hunters, shallow materialists, religious nuts, savage capitalists, the all-powerful Jewish lobby, the oil lobby, the military-industrial complex, and bloodthirsty cowboy-presidents.

In this dream palace, the Hollywood clichés are taken to be real. George Bush really is Rambo, Clint Eastwood, and John Wayne rolled into one. American life really is “NYPD Blue” and “Baywatch.” In this dream palace, Oliver Stone is as trustworthy as the Washington Post, Michael Moore accurately depicts the American soul, “Dr. Strangelove” is a textbook of American government, and Noam Chomsky tells it like it is.

In the European dream palace, Americans are terminally naive, filled with crazy notions like the belief that Arabs are capable of democracy. In this vision of reality, Americans are at once childish, selfish, and trigger-happy, but Arabs live just this side of savagery. Any action that might rile them will cause the Arab street to explode, and will lead to a thousand more bin Ladens. In this dream palace, history is tragic, and teaches us it is always prudent to do nothing—to do nothing about Bosnia, to do nothing about Kosovo, to do nothing about Rwanda, to do nothing about the slow-motion holocaust unleashed in Iraq by Saddam.

Finally, there is the dream palace of the American Bush haters: In this dream palace, there is so much contempt for Bush that none is left over for Saddam or for tyranny. Whatever the question, the answer is that Bush and his cronies are evil. What to do about Iraq? Bush is evil. What to do about the economy? Bush is venal. What to do about North Korea? Bush is a hypocrite.

In this dream palace, Bush, Cheney, and a junta of corporate oligarchs stole the presidential election, then declared war on Iraq to seize its oil and hand out the spoils to Halliburton and Bechtel. In this dream palace, the warmongering Likudniks in the administration sit around dreaming of conquests in Syria, Iran, and beyond. In this dream palace, the boy genius Karl Rove hatches schemes to use the Confederate flag issue to win more elections, John Ashcroft wages holy war on American liberties, Donald Rumsfeld, Paul Wolfowitz, and his cabal of neoconservatives long for global empire. In this dream palace, every story of Republican villainy is believed, and all the windows are shuttered with hate.


THESE DREAM PALACES have taken a beating over the past month. As the scientists would say, they are conceptual models that failed to predict events. But as we try to understand the political and cultural importance of the war in Iraq, the question is this: Will they crumble under the weight of undeniable facts? Will the illusions fall, and the political landscape change?

My first guess is that the dream palace of the Arabists will temporarily sag. As happened after the Six Day War back in 1967, the newspapers and TV networks that depicted glorious Arab victories and failed to prepare their audiences for the crushing defeat that came will see their credibility suffer. The radicals who preach eternal war with the infidel will seem stale, architects of a failed vision. As happened after Desert Storm, the Arabs who preach reform and modernization will begin to seem more attractive. There will be some restlessness, some searching for a fresh start and a different way, and thus a window of opportunity will open for democratization and peace, but that opening will have a termination date. The window will close if, a year or two hence, millions of Arabs continue to feel humiliated by their region’s backwardness. They will go looking again for conspiracy theories, victimhood, and rage.

My second guess is that Europeans will not shake off their clichéd image of America. The stereotypes are entrenched too deeply. But official Europe will go through one of its periodic phases of gloomy and self-lacerating introspection. There will be laments about European impotence, continental divisions, the need to build a common European alternative. But this self-criticism will not spark any fundamental change, just summits, conferences, and books.

My third guess is that the Bush haters will grow more vociferous as their numbers shrink. Even progress in Iraq will not dampen their anger, because as many people have noted, hatred of Bush and his corporate cronies is all that is left of their leftism. And this hatred is tribal, not ideological. And so they will still have their rallies, their alternative weeklies, and their Gore Vidal polemics. They will still have a huge influence over the Democratic party, perhaps even determining its next presidential nominee. But they will seem increasingly unattractive to most moderate and even many normally Democratic voters who never really adopted outrage as their dominant public emotion.

In other words, there will be no magic “Aha!” moment that brings the dream palaces down. Even if Saddam’s remains are found, even if weapons of mass destruction are displayed, even if Iraq starts to move along a winding, muddled path toward normalcy, no day will come when the enemies of this endeavor turn around and say, “We were wrong. Bush was right.” They will just extend their forebodings into a more distant future. Nevertheless, the frame of the debate will shift. The war’s opponents will lose self-confidence and vitality. And they will backtrack. They will claim that they always accepted certain realities, which, in fact, they rejected only months ago.

BUT THERE IS ANOTHER, larger group of people whose worldviews will be permanently altered by the war in Iraq. Members of this group were not firm opponents of the war. Indeed, they were mild supporters, or they were ambivalent. They were members of the vast, nervous American majority that swung behind the president as the fighting commenced.

These people do not have foreign policy categories deeply entrenched in their brains. They don’t see themselves as hawks or doves, realists or Wilsonians. They don’t see each looming conflict either through the prism of Vietnam, as many peaceniks do, or through the prism of the 1930s and the Cold War, as many conservatives do. They don’t attract any press coverage or much attention, because they seldom take a bold stand either way. Their foreign policy instincts are unformed. But they are the quiet people who swing elections.

What lessons will they draw from the events of the past month? How will the fall of Saddam affect their voting patterns, their approach to the next global crisis? One way to think about this is to conduct a thought experiment. Invent a representative 20-year-old, Joey Tabula-Rasa, and try to imagine how he would have perceived the events of the past month.

Joey doesn’t know much about history; he was born in 1983 and was only 6 when the Berlin Wall fell. He really has no firm idea of what labels like liberal and conservative mean. But now he is in college, and he’s been glued to the cable coverage of the war and is ready to form some opinions. Over the past months, certain facts and characters have entered his consciousness, like characters in a play he is seeing for the first time.

The first character is America itself: He sees that his country is an incredibly effective colossus that can drop bombs onto pinpoints, destroy enemies that aren’t even aware they are under attack. He sees a ruling establishment that can conduct wars with incredible competence and skill. He sees a federal government that can perform its primary task—protecting the American people—magnificently.

These are obviously not the things Joey would have seen if he had come of age in 1972, and his mentality is likely to be radically different from that of many people of the sixties generation. He is likely to feel confident about American power. He is likely to assume that when America projects its might, it is not only great, but good. Its pilots fly low, at some risk to themselves, to reduce civilian casualties. Teams of lawyers vet bombing targets to minimize unnecessary damage. Efforts are made to spare enemy soldiers who don’t want to fight. The military, moreover, is fundamentally open to the press, allowing embedded reporters to wander amidst the troops. The ruling class is reasonably candid about the war’s progress. The anonymous people in the corridors of power basically seem to know what they are doing.

The American system of government, moreover, is clearly the best system. In Joey’s eyes, the United Nations is a fractious debating society. The European Union is split. The French are insufferable, the Germans both hostile and pacifist. The Arab ruling class is treacherous. Billions of people around the world seem to hate us, and while Joey is aware that there are some reasons to be suspicious of the United States, he resents the way so many people are over the top in their resentment, fury, and dislike. In short, Joey does not look around and assume that the world is moving toward some world government or global unity. When the chips are down, there are very few nations you can trust. Joey is both more trusting of America, and more suspicious of the world, than he would have been if he had formed his worldview in the 1990s.

The second great character on Joey’s mind is the American soldier: When Joey thinks of youthful idealism, he doesn’t think of college students protesting in the streets, he thinks of young soldiers risking their lives to liberate a people. These are the men and women Joey saw interviewed by the dozen on TV. They seemed to enjoy being in the military. They seemed to believe in their mission. They seemed to be involved in something large and noble even at a young age.

In Joey’s eyes, the people who get to do the most exciting things are not members of the meritocratic elite—Harvard and Stanford alums who start software companies. They are the regular men and women of the armed forces, or, as he remembers from the days after 9/11, they are firemen and cops. They are people without prestigious degrees and high income prospects.

Joey naturally feels that while those soldiers are liberating a country and talking about duty and honor, all he is doing is preparing for business school. That doesn’t mean he necessarily wants to enlist, but he is aware that there is something lacking in his pampered private life. He also sees, in the example the soldiers set, that discipline, neatness, professionalism, and openly expressed patriotism are kind of cool.

The third character Joey sees is the terrorist: He sees the people who blew up the World Trade Center. In Iraq, people like that piled into pickups and suicidally attacked tanks. They wore those black fedayeen gowns. In Israel, they strap bombs to their waists and blow up buses. Joey is aware that there are a lot of people, especially in the Arab world, who are just batshit crazy. There is no reasoning with these people. They understand only force, and they must be crushed.

Joey sees that some regimes around the world are sadistic and evil. They torture and mutilate their own people. They ignore the basic rules of warfare and civilization. Conflict with these people is inevitable. They lurk in the dark corners of the globe, and for some reason they think they should take out their problems on us. You always have to be on guard, because there really is evil about.

WHEN JOEY LOOKS at the talking heads on TV, he begins to form judgments about this country’s political divides. First, he sees the broad majority of people who support the war, who, it seems to him, deserve to be called the progressives. These people talk optimistically of spreading democracy and creating a new Middle East. They have a very confident approach to what America can achieve in the world. People in this political movement include Christopher Hitchens, Dennis Miller, Paul Wolfowitz, Joseph Lieberman, John McCain, Richard Holbrooke, Charles Krauthammer, the staff of Fox News, Bernard Lewis, and George Bush.


These people tend to endorse progressive interventionism, not only in Iraq, but in places like Kosovo. They use the explicitly moral language of good and evil. Joey is a little nervous that they are not realistic about what can actually be achieved in this messy world. He’s afraid they might bite off more than they can chew. But he gives them credit for their idealism, their hope, their grand vision.

The second group Joey sees he calls the conservatives. These people are far more skeptical of the war and grand endeavors of that sort. They emphasize all the things that could go wrong. They seem more prudent and less idealistic or visionary. They were not necessarily implacably opposed to the effort in Iraq, but they thought it imprudent. People in the conservative camp include Brent Scowcroft, Joe Klein, the State Department, John Kerry, Chris Matthews, Robert Novak, and most of the press corps.

When Joey listens to these conservatives, he thinks they raise some valid concerns. They serve as a useful brake on the progressives, but they are not exactly inspiring or hopeful, and their prognostications on Iraq proved more wrong than right.

The final group Joey sees on the political landscape are the marchers. These people are always in the streets with their banners and puppets. They march against the IMF and World Bank one day, and against whatever war happens to be going on the next. Joey is not sure what these people are for. They don’t seem to have any alternative to globalization. They don’t seem to know how to deal with the Taliban or Saddam. They just march against. Joey figures it must be part of their personality.

Joey knows that this is what people did in the 1960s, and he regards the marchers as vaguely archaic. He knows that they tend to come from Hollywood and academia. Joey is not hostile to those worlds. He loves movies and likes many of his professors. He just senses that they are cloistered worlds, removed from day-to-day reality, and he doesn’t plan on spending his life there. Marching for peace is something people in those worlds do, just as Mormons devote a few years of their lives to missionary work, or Jews keep kosher. It does not occur to Joey to enter the subculture of the protesters, and what they say is not likely to affect him one way or another.

Joey likes to think of himself as fundamentally independent. He looks at the people living in their dream palaces—the Arabists, the European elites, the Bush haters—and he knows he doesn’t want to be like them. He doesn’t want to be so zealous and detached from reality. He’s not even into joining political movements at home. But he is less independent than he thinks. He has started to acquire certain assumptions over the past months, which will shape his thinking in years to come. As a rule, these assumptions are the exact opposite of the assumptions he would have formed if he had been watching the Vietnam war unfold. His politics will be radically different from those of the Vietnam generation.

Moreover, new categories are crystallizing in his mind. These categories—who is progressive, who is conservative, who is reactionary—do not comport with the categories in the minds of people who came of age during the civil rights era, or even the Cold War.

Joey isn’t one of a kind. There are millions of Joeys, and variations on Joey. Inevitably, then, in ways subtle and profound, the events of the past month will shape our politics for the rest of our lives…


#shouldread #weekendreading #oranehairedbaboons

Fama’s Fallacy: Hoisted from Ten Years Ago

Clowns (ICP)

I was profoundly embarrassed by and ashamed of the Swedish Nobel Committee and of being an economist when they awarded the Nobel Prize to Eugene Fama.

You see, the economists who cheerled for the Trump-McConnell-Ryan tax cut and claimed it would rapidly and permanently boost annual investment in America by 800 billion had arguments—bad arguments. The economists who condemned Benanke’s quantitative easing and claimed it would soon lead to high inflation and a debased dollar had arguments—bad arguments. I do not think any of them made those bad arguments in good faith: the failure of those in either group to acknowledge that they got a big one wrong and to engage in Bayeisan updating is interesting: that silence speaks volumes.

But Fama and the others who claimed a decade ago that, while private decision to spend more boosted employment and production, public decisions to spend more—fiscal stimulus—not only would not, but could not possibly ever boost employment and production… they had no argument at all.

What do I mean? This. This is why I am embarrassed and ashamed: Hoisted from Ten Years Ago: Fama’s Fallacy, Take I: Eugene Fama Rederives the “Treasury View”: A Guestpost from Montagu Norman, former Governor of the Bank of England:

Back in the 1920s and 1930s—in the days that overly-clever bisexual academic dilettante John Maynard Keynes was trying to persuade us that if only we got the government to spend more money the unemployment rate might go down—by far the silliest argument against his position was the one put forward by the staff of the Chancellor of the Exchequer: the so-called “Treasury View.”

The Treasury View was that nothing could boost employment: not government spending, not tax cuts, not private business decisions to expand their capacity, not irrational exuberance on the part of entrepreneurs—for the level of output was what it was and the unemployment rate was what it was and no fiscal policies or private investment decisions could change it, for all they could do was move resources from one use to another without affecting the total flow of economic activity.

Back on Christmas Eve Paul Krugman whacked Caroline Baum of Bloomberg on the nose for rediscovering the Treasury View. Now Eugene Fama of the University of Chicago has rederived it from scratch (apparently without knowing anything of its history), claiming that the savings-investment national income identity proves that fiscal policy cannot have any effect on output and employment.

This is a howler of such magnitude that it has pulled me from my grave to speak—because we went over and over this in the 1920s starting with R.G. Hawtrey (1925), “Public Expenditure and the Demand for Labour,” Economica 5, pp. 38-48, and with F.W. Leith-Ross’s various Treasury memos to P.J. Grigg, and thrashed this out to a conclusion that Fama appears not to know. It is very strange: the argument Fama wants to make—that government deficits completely crowd out private investment so that fiscal policy has no effect on output or employment—is, depending on circumstances, sometimes true and usually false, depending on circumstances. But the premise from which Fama attempts to derive complete crowding-out is the savings-investment accounting identity in the National Income and Product Accounts—and an accounting identity is something that must be true by construction, no matter what. The fact that savings equals investment in the NIPA is logically independent of whether the complete crowding-out doctrine is true or false.

Here is Fama:

Bailouts and Stimulus Plans: There is an identity in macroeconomics… private investment [PI] must equal the sum of private savings [PS], corporate savings (retained earnings) [CS], and government savings [GS]….

(1) PI = PS + CS + GS….

The problem is simple: bailouts and stimulus plans are funded by issuing more government debt…. The added debt absorbs savings that would otherwise go to private investment…. [S]timulus plans do not add to current resources in use. They just move resources from one use to another…. I come back to these fundamental points several times below….


The Sad Logic of a Fiscal Stimulus: In a “fiscal stimulus,” the government borrows and spends the money on investment projects or gives it away as transfer payments to people or states. The hope is that government spending will put people to work…. Unfortunately, there is a fly in the ointment…. [G]overnment infrastructure investments must be financed — more government debt. The new government debt absorbs private and corporate savings, which means private investment goes down by the same amount….

Suppose the stimulus plan takes the form of lower taxes… we can’t get something for nothing this way either… lower tax receipts must be financed dollar for dollar by more government borrowing. The government gives with one hand but takes them back with the other, with no net effect on current incomes…

Fama’s reasoning is that fiscal policies don’t change private saving, but fiscal policies do change the government deficit, thus investment must change in an amount equal and opposite to the change in the government deficit. Fama’s reasoning is dead wrong. Fama’s reasoning is dead wrong for an elementary reason. The accounting identity that savings are equal to investment is true only under a particular definition of investment—one that counts unwanted growth in inventories as part of investment—and under a particular valuation of unexpected inventory accumulation—that which values unwanted inventory accumulation at its cost.

In general, the value of unwanted inventory accumulation can’t be equal to its cost—the inventory accumulation is unwanted and unexpected, meaning that they tried to sell it at a normal price and failed, and it is now sitting in a corner of a warehouse somewhere. When Fama writes “bailouts and stimulus plans… absorbs savings that would otherwise go to private investment” he does not think that the rise in public spending is truly useful stuff while the fall in private investment is a decline in unwanted inventory accumulation—a decline in the amount of stuff made at high cost that firms could not sell and then must mark down in value.

This matters a lot because whenever unwanted inventories accumulate the next thing that happens is that incomes and savings drop. (i) NIPA-defined investment is equal to (ii) private savings minus the (iii) government deficit, so if (iii) changes and (ii) doesn’t then (i) must change. But if that change in NIPA-defined investment is driven by unwanted inventory accumulation or unexpected inventory declines then private savings do change, and do change quickly and substantially.

Let’s tell the story of how:

Suppose that it is Friday, January 2, 2009, and all of a sudden the federal government borrows some money—reducing savings—and buys some extra stuff. Savings is still equal to investment on January 2: savings went down because the government ran a bigger deficit but investment also went down because firms sold extra and so their inventories dropped.

What happens on Monday, January 5? Over the weekend the firms mark the value of the goods in their remaining inventory up: inventories are now scarce. They revisit their production plans. Sunday night they call some extra workers and tell them to show up on Monday—that they are expanding production because they are now short of inventories. So when Monday rolls around more people are at work. Thus incomes are higher on Monday than they were on Friday. And in all likelihood savings will be higher as well, for consumers on Monday probably won’t raise their consumption spending by as much as their incomes rose. Maybe on Monday purchases will be back in balance with production, and there will be no more unwanted inventory changes. Maybe it will take until Monday January 12 before the change in inventories is back to its desired level. Maybe it will take until the third quarter of 2009, or perhaps 2010. But when the change in inventories does come back to its wanted level, production, employment, income, savings, and investment will all be higher than they were on January 1: the stimulus will have worked.

Yet at every point—on every single day—savings are equal to investment according to the accounting conventions of the National Income and Product Accounts. Fama’s premise holds. His conclusion—that stimulus programs cannot work—doesn’t. How can this be? The reason is that his conclusion has nothing at all to do with his premise. Whether there is complete crowding-out depends on circumstances—on how much of offsetting investment changes are unwanted and unexpected changes in inventories, and what the consequences of those unwanted and unexpected changes in inventories are for private savings. But whether there is complete crowding-out or not, savings always equals investment in the NIPA framework by construction, by definition.

Thus Fama’s claim that “stimulus spending must be financed which means it displaces other current uses of the same funds…” rests on Fama’s implicitly making one of two assumptions: either that stimulus spending does not lead to any surprise reduction in inventories, or that a surprise fall in inventories does not lead to any change in the flow of saving. Make either of these assumptions, and Fama’s argument goes through—but it is those ancillary assumptions that Fama does not explicitly own up to that drive his conclusion, not his stated premise of the truth of the NIPA savings-investment identity.

But why should you make either assumption? Why would you ever assume that there can’t be unwanted growth in inventories? Why would you ever assume that household incomes and saving do not change whenever firms’ stocks of unwanted inventories grow ever larger?

The answer is that you never would—but that Fama does not know enough national income accounting to know that that he is making these two ancillary assumptions. He does not understand the identity he deploys as equation (1). He thinks that “investment” means “growth in the value of the capital stock.” He simply does not understand what the NIPA investment concept is, or that what he thinks of as “investment” is not in general equal to savings.

All of this is part of the undergraduate sophomore economics curriculum. It is gone over again very quickly in graduate school—for example, David Romer (2006), Advanced Macroeconomics 3e, p. 224:

If one treats goods that a firm produces and then holds as inventories as purchased by the firm, then all output is purchased by someone. Thus actual expenditure equals the economy’s output, Y. In equilibrium, planned and actual expenditure must be equal. If planned expenditure falls short of actual expenditure, for example, firms are accumulating unwanted inventories; they will respond by cutting their production…

These mistakes are, literally, elementary ones.

They were elementary when R.G. Hawtrey and the other staffers of the British Treasury made them in the 1920s.

They carry the implication not just that government cannot stimulate or depress the economy, but that no set of private investment or savings decisions can stimulate or depress the economy either, and thus that there can be no business cycle fluctuations from any source whatsoever—because every action that shifts savings or investment simply moves resources from one use to another.

What is extraordinary is that these mistakes are being rederived today, at the end of the 2000s—without any consciousness of their past or of the refutations of them made by past theory and history.

I think it is time to draw a line in the sand: no more economists who know nothing about the economic history of the world or the history of economic thought.

I, the ghost of Montagu Norman, have risen from my grave to say this.

Jeebus save us…

Fama’s Fallacy II: Predecessors: Eugene Fama’s predecessors in error. The “Treasury View.” From G.C. Peden (2004), Keynes and His Critics, p. 80:

F.W. Leith-Ross to Sir Richard Hopkins and P.J. Grigg, 3 April 1929: Before the government can give increased employment it must obtain resources…. Unless the government is prepared to… bring about an inflation… [it] can only obtain [resources] by taxation or borrowing…. The proposal that we are examining is that all the money required is to be borrowed…. When the Government borrows, it enters the money market as a competitor with all other enterprises…. The resources from which the government must draw… are the savings of the people…. But it is precisely on these that industry relies on…. The competition of the Government with private traders by means of large Government loans would not (apart from inflation) increase the resources available for the employment of labour. It would only mean that a portion of these resources would be directed by the Government instead of being directed by private persons…

Fama, actually, is much worse than the British Treasury economists of the 1920s. They acknowledged that monetary policy could affect the level of employment–could do more than shift resources from one use to another. Fama’s argument based on his misinterpretation of the NIPA savings-investment identity has the implication that monetary policy cannot affect the unemployment rate either.

See R.G. Hawtrey (1925), “Public Expenditure and the Demand for Labour,” Economica 5, pp. 38-48…

Fama’s Fallacy, Take III: “… >…Ummm… Greg Mankiw writes:

Fama on Fiscal Stimulus: Eugene Fama is a stimulus skeptic: In fact, he is even more skeptical than I am. I am willing to concede that many Keynesian effects work in the short run, although I prefer monetary policy to fiscal policy and, within fiscal policy, I prefer the use of tax instruments to government spending as a tool for short-run demand management. By contrast, I read Fama’s article as a largely wholesale endorsement of the classical model with complete crowding out…

No, Greg. It’s not an endorsement of any model. It’s just a mistake. Fama mistakes the NIPA savings-investment accounting identity for a behavioral relationship that constrains the behavior of investment: when the government deficit goes up, Fama says, private investment must go down by the same amount.

The complete crowding-out argument is different: it is that the velocity of money is completely interest-inelastic, so when government purchases rise that triggers a rise in interest rates large enough to discourage investment and exports, and the sum of the discouragement equals the rise in government purchases. It is something that happens in equilibrium because prices move to make it so. In Fama there are no prices moving. There is just an accounting identity.

When the government deficit goes up, private savings could go up by more—and private investment could increase. Private savings could go up by less—and private investment would fall by less than the rise in the government deficit. Private savings could remain unchanged. Or private savings could fall. Determining which of these is most likely to happen would require a model of the economy of some sort—and Fama does not have one: all he has is an accounting identity that he does not understand…

Fama’s Fallacy IV: The Decline of Chicago: Note to Self: How to make the “crowding out” argument the intellectually coherent way.

Milton Friedman (1972), “Comment on the Critics,” Journal of Political Economy 80:5 (September-October), pp. 914-5 “‘I do not share the widespread view that a tax increase which is not matched by higher government spending will necessarily have a strong braking effect on the economy…

…True, higher taxes would leave taxpayers less to spend. But this is only part of the story. If government spending were unchanged, more of it would now be financed by the higher taxes, and the government would have to borrow less. The individuals, banks, corporations or other lenders from whom the government would have borrowed now have more left to spend or to lend-and this extra amount is precisely equal to the reduction in the amount available to them and others as taxpayers. If they spend it themselves, this directly offsets any reduction in spending by taxpayers. If they lend it to business enterprises or private individuals—as they can by accepting a lower interest rate for the loans the resulting increase in business investment, expenditures on residential building and so on indirectly offsets any reduction in spending by taxpayers.

To find any net effect on private spending, one must look farther beneath the surface. Lower interest rates make it less expensive for people to hold cash. Hence, some of the funds not borrowed by the Federal government may be added to idle cash balances rather than spent or loaned. In addition, it takes time for borrowers and lenders to adjust to reduced government borrowing. However, any net decrease in spending from these sources is certain to be temporary and likely to be minor.

To have a significant impact on the economy, a tax increase must somehow affect monetary policy—the quantity of money and its rate of growth. (Newsweek, January 23, 1967, p. 86)….

Why “certain to be temporary”? Because the leftward shift in the IS curve is a once-for-all shift…. Put in monetarist terms, the lowered interest rate resulting from the federal government’s absorbing a smaller share of annual savings will reduce velocity; the transition to the lower velocity reduces spending for a given money stock….

Why “likely to be minor”? Because the monetarist view is that “saving” and “investment” have to be interpreted much more broadly… that the categories of spending affected by changes in interest rates are far broader than the business capital formation, housing construction, and inventory accumulation to which the neo- Keynesians tend to restrict “investment.” Hence, even a fairly substantial tax increase will produce only a minor shift in the IS curve….

Of course, the terms “temporary” and “minor” are highly imprecise. We get closer to a rigorous statement by comparing the changes resulting from a reduced or increased deficit without any change in monetary growth with those that result when a change in the deficit is matched by a dollar-for-dollar change in monetary growth…. [A] deficit financed by borrowing… [is] a once-for-all shift to the right in the IS curve, a higher interest rate, a higher velocity, and a higher level of spending for a given monetary growth path…. [F]inancing the deficit by creating money… shifts the LM curve to the right…. But this is not a once-for-all shift. So long as the deficit continues, and continues to be financed by creating money, the nominal money stock continues to grow and the LM curve (at initial prices) continues to move to the right. Is there any doubt that this effect must swamp the effect of the once-for-all shift of the IS curve?…

We may put this point differently. Assume a one-year increase in the deficit, with the budget then returning to its initial position. If this is financed by borrowing from the public with no change in monetary growth, then, in the most rigid Keynesian system, the IS curve moves to the right and then back again; real and nominal income rise for one year, then return to their initial values. If the one-year increase in the deficit is financed by creating money, the LM curve moves to the right as well, and stays there after the IS curve returns to its initial position. If prices remain constant, real and nominal income stay at a higher level indefinitely. If, as is more reasonable, prices ultimately rise, real income may return to its initial level, but nominal income will stay at a higher level indefinitely. Surely, to paraphrase a remark of Tobin’s in another connection, the monetary effect is “alchemy of a much deeper significance” than the fiscal effect…

For Friedman, the NIPA savings-investment identity is the prelude to the analysis: the meat of the analysis involves going deeper by:

  • arguing that savings and income levels will adjust so that the economy will quickly move to a point at which unwanted inventory accumulation is zero (that’s the “IS curve”).
  • analyzing the combination of possible values for interest rates and output levels at which unwanted accumulation is zero (that’s the shape and position of the “IS curve”).
  • assessing how the changing financial asset supplies and demands in the economy pick out a particular point on the IS curve (that’s the “LM curve”).

For Fama, the NIPA savings-investment identity is the completion of the analysis—hence he gets driven to the conclusion that not just fiscal policy via the government deficit but monetary policy via open market operations has no effect on employment and output as well.

This makes me think I should finish writing up one of the talks that I gave in Singapore—the point of which was that Chicago economists today are profoundly ignorant of what the Chicago School of economics—the school of Friedman and Stigler—believes…

Fama’s Fallacy V: Are There Ever Any Wrong Answers in Economics?: Montagu Norman here, back from my grave once again. This time it is Greg Mankiw whose words have summoned me…

One thing that used to give me nightmares—and that provoked several of my nervous breakdowns—was how you could never get any economist (except for John Maynard Keynes) to take a definite position. They were always “on the one hand—on the other hand.” This was what led Harry Truman in later days to wish for a one-handed economist, a wish that has never been fulfilled—there is in fact a picture of Barack Obama’s economic advisor Christina Duckworth Romer in Time (or is it Newsweek?) showing her with four hands…

The “on the one hand—on the other hand” nature of discourse raises the question of whether in economics—a “science” where there is enormous intellectual and ideological and political disagreement about how the world works—there can ever be any wrong answers?. I believe that there can be wrong answers in economics, because examinations in economics tend to take a particular form: instead of asking (i) “do expansionary fiscal policies increase output and employment?” we ask (ii) “in models where there are idle resources and high unemployment, do expansionary fiscal policies increase output and employment?” (ii) is a question about a particular class of models of the economy, and so has a definite right answer—”yes, in that class of models they do”—and a definite wrong answer—”no, in that class of models they don’t.”

Eugene Fama claimed that “when there are idle resources—unemployment” expansionary fiscal policies had no effect in models in which the NIPA savings-investment identity:

investment = (private savings) – (government deficit)


Now the NIPA savings-investment identity holds in all models—it is, after all, an identity, true by definition and construction. And every single model that has been built in which there is a possibility of high unemployment and idle resources is a model in which fiscal policy works because increases in government spending lead to unexpected declines in inventories and unexpected declines in inventories lead to firms to expand production, which leads to increases in income and saving.

I would, therefore, say that Fama’s claim is “wrong”. Not only does it not hold in all models in the class, it does not hold in any models in the class.

Greg Mankiw disagrees:

Greg Mankiw’s Blog: Fama’s arguments make sense in the context of the classical model… presented in Chapter 3 of my intermediate macro textbook…. I would go on to the Keynesian model…. But whether one leaves the classical model behind to embrace the Keynesian model is a judgment call…

Mankiw thinks that Fama is not wrong but is, rather, making a “judgment call.”

But Mankiw writes in his chapter 3 that the classical model “assume[s] that the labor force is fully employed.” And so Greg gets himself into Cretan Liars’ Paradox territory here: Fama says that there is high unemployment and idle resources, while Mankiw says that Fama is not wrong because he makes sense as long as the labor force is fully employed and there are no idle resources.

Is Mankiw’s answer here a “wrong” answer, or is he too making a “judgment call”? I seek an empirical test. I seek a Harvard undergraduate to take Greg Mankiw’s course this spring, to write the following in an appropriate place:

the classical model of chapter 3 shows us that expansionary fiscal policies have no effect on output even where there are idle resources—unemployment.

and to report back on the reaction of the course instructors…


Fascism is Not an Idea to Be Debated, It’s a Set of Actions to Fight

Aleksandar Hemon: Fascism is Not an Idea to Be Debated, It’s a Set of Actions to Fight: “It is frightening to think we could be entering the civil war mode, wherein none of the differences and disagreements can be hashed out in discussion. It is quite possible that there is no resolution to the present situation until one side is thoroughly destroyed as an ideological power and political entity. If that is the case, the inescapable struggle requires that anti-fascist forces clearly identify the enemy and commit to defeating them, whoever they are, whatever it takes. The time of conversations with fascists is over, even if they might be your best friend from high school…

#shouldread #neofascism #orangehairedbaboons 

The Great American Tax Heist Turns One: Live at Project Syndicate

Clowns (ICP)

Time has passed: a year’s worth of water under the bridge. But I have not become less angry at and disappointed with how the Republican economists behaved in what my Project Syndicate editors call the Great American Tax Heist of last December.

But I do need to offer a correction—I missed this in editing. There is daylight between Greg Mankiw and the others. It is not true that Greg Mankiw “claimed that the productivity gains stemming from the tax package would primarily boost wages”. Rather, Mankiw claimed that in analyzing the proposed Trump tax cut the “relevant exercise… [was] an open economy… [in which] he capital stock adjusts so that the after-tax marginal product of capital equals the exogenously given world interest rate r” and thus that the productivity gains stemming from the tax package would primarily boost wages.

There is daylight in the distinction between “claimed” and “relevant exercise shows”…

I regret my error.

Live at Project Syndicate: The Great American Tax Heist Turns One: Last December, Republicans relied on the support of conservative economists who predicted that the party’s corporate tax cuts would boost productivity and investment in the United States substantially. The forecasts were wrong, and the silence of those who made them suggests that they knew it all along….

Critics of the “Tax Cuts and Jobs Act” described it as a cynical handout for wealthy shareholders. But a substantial number of economists came out in support of it…. One prominent group, most of whom served in previous Republican administrations, predicted in The Wall Street Journal that the tax cuts would boost long-run GDP by 3-4%, with an “associated increase” of about 0.4% “in the annual rate of GDP growth” over the next decade. And in an open letter to Congress, a coterie of over 100 economists asserted that “the macroeconomic feedback generated by the [tax cuts]” would be “more than enough to compensate for the static revenue loss,” implying that the bill would be deficit-neutral over time… Read MOAR at Project Syndicate

#shouldread #macro #economicgrowth #fiscalpolicy #highighted #orangehairedbaboons #moralrsponsibility 

Fairly Recently: Must- and Should-Reads, and Writings… (December 12, 2018)


  1. Two Differences Between a Clinton Administration and a Trump Administration…: Overwhelmingy, those writing opeds and releasing studies boosting last year’s Trump-McConnell-Ryan corporate tax cut knew that the forecasts they made last year were overwhelmingly likely to be wrong. So they are not surprised when they turn out to be wrong. And they do not even think it worthwhile to go through the motions of pretending to be surprised that the investment share of national income and product in 2012 dollars is 18% and not 22%. So I say to Binyamin Applebaum, and to other reporters who wrote up—much less critically then they should have—what the administration was saying and what corporate tax cut-boosting economists from Barro to Taylor and company were saying last year: remember: “fool me once, shame on you; fool me twice, shame on me”…

  2. Hoisted from the Archives: Matthew Yglesias: The Lies, The Lies of Andrew Sullivan

  3. Fall 2018 Econ 101b Exam: U.C. Berkeley

  4. Note to Self: Watching Niskanen Center Live Stream: “Starting Over: The Center-Right After Trump…

  1. Cosma Shalizi (1998): Psychoceramics: “Psychoceramics could… play a… role… analogous to that of lesion studies in neuropsychology. A working intellectual discipline, like probability theory or Sanskrit philology, has mechanisms which keep it from going off the rails, and keep cranks from taking over; most of the time and on balance, they produce reliable knowledge. This is manifestly not the case outside the bounds of such disciplines… #orangehairedbaboons #publicsphere #cognitive

  2. Ezra Klein: Political Tribalism in Trump’s America: What Andrew Sullivan Gets Wrong: “I knew when we launched Vox that there would be criticisms I didn’t anticipate, but I’ll admit, I never foresaw one of them being that writing explainers doesn’t satisfyingly replace the role of religion in people’s lives. Yet here we are…. That’s Andrew Sullivan writing in New York magazine, and while the column caught my attention for that line, which I will now have needlepointed on a pillow, the broader piece is wrong in more important, less amusing, ways… #shouldread #orangehairedbaboons #journamalism

  3. Always remember that Andrew Sullivan glories in misleading the public by telling them lies: “The Krugmans and the Chaits will shortly have a cow, if not a whole herd of them…. To which my response is: Hoorah…. Commentators… get steamed because Bush has… claimed his tax cut will cost less than it actually will… is using Medicare surplus money today that will be needed tomorrow and beyond…. The fact that Bush has to obfuscate his real goals of reducing spending with the smoke screen of ‘compassionate conservatism’ shows how uphill the struggle is.” When somebody tells you he is an evil, deceptive f—, believe him: HOLLYzoy: Besides @ezraklein ‘s Point About Andrew Sullivan, a Few Others: “‘But the banality of the god of progress, the idea that the best life is writing explainers for Vox in order to make the world a better place, never quite slakes the thirst for something deeper’. I think that sneering at this impulse makes sense only if you don’t ask the people involved what ‘making the world better’ means. Suppose you thought: democracy is the best political system. But it requires a reasonably informed citizenry to work. It’s always hard for people to be adequately informed (they have lives.) But doubly so now, when entire networks etc. are actively trying to mislead them. Then those of us who have a knack for it should try to step up, and make it easier. How is this shallow or banal? If done right, it is a way of supporting democracy, and of empowering our fellow citizens. It also helps them to spot demagogues and charlatans. If you think that democracy is an inspiring ideal (I do), then this is an inspiring thing to do… #orangehairedbaboons #journamalism #publicsphere

  4. Philo: On the Cherubim: “Is my mind my own private possession? It is a creator of lies, a founder of wandering, of paranoia…

  5. How did Evangelicals miss the memo that God saves you later only if you save the image of God in your neighbor today?: “Lord, when saw we thee an hungred, or a thirst, or a stranger, or naked, or sick, or in prison, and did not minister unto thee?”: Ronald Brownstein: Trump’s Coalition Is Cracking: “Evangelical Christians this year comprised fully 45% of all white voters without a college degree, a substantial portion of the total electorate. By contrast, evangelicals represented only one-fourth of college-educated white voters. (In 2016, the exit polls found that evangelicals constituted slightly larger shares of each group.) In all of the southern states where the question was asked this year, evangelicals represented a majority of working-class white voters, including fully two-thirds in Georgia and Tennessee. Evangelicals were also a majority of white working class voters in West Virginia and Indiana and exactly half in Missouri… #orangehairedbaboons

  6. Principles of Neoliberalism: .Neoliberalism is many things…

  7. Allin Cottrell (2003): Word Processors: Stupid and Inefficient

  8. Kieran Healy: The Plain Person’s Guide to Plain Text Social Science

  9. Daniel Donner: Requiem for a California Dream: “It is especially delicious, then, to watch the real-time collapse of the Republican Dream in California—and specifically Orange County—as the state party’s power shrivels into a desiccated lump of greenish oatmeal. Meanwhile, California as a whole enjoys its status as one of the most diverse and dynamic states in the country, with a thriving combination of culture and creativity—and, yes, taco stands on many corners, if not every one—making it one of the most desired regions in the world in which to live, work, or play… #politics #california #orangehairedbaboons

  10. Paul Krugman: Botching the Great Recession: “The acute phase of the financial crisis… was relatively brief… scary and did immense damage—America lost 6 ½ million jobs in the year after Lehman fell. But… measures of financial stress fell off rapidly in 2009, and were more or less back to normal by the summer. Rapid financial recovery did not, however, produce rapid recovery for the economy as a whole. As the same figure shows, unemployment stayed high for many years…

  11. TV Tropes: [Literature/Badass Creed( “The millennia-old messenger golem Anghammarad remembers a badass version of the A-M Post Office motto from the dawn of time: ‘Neither Deluge Nor Ice Storm Nor The Black Silence Of The Netherhells Shall Stay These Messengers About Their Sacred Business. Do Not Ask Us About Sabre-Tooth Tigers, Tar Pits, Big Green Things With Teeth Or The Goddess Czol.’ Inevitable question: The Goddess Czol? Anghammarad: Do Not Ask…

  12. The first occurrence of “Be still my heart!”: Homer: The Odyssey: “Ulysses lay wakefully brooding upon the way in which he should kill the suitors; and by and by, the women who had been in the habit of misconducting themselves with them, left the house giggling and laughing with one another…. His heart growled within him… But he beat his breast and said, ‘Heart, be still, you had worse than this to bear on the day when the terrible Cyclops ate your brave companions; yet you bore it in silence till your cunning got you safe out of the cave…’

  13. Noah Smith: Trump’s Embrace of Tariffs Hurts U.S. Consumers More Than China: “Trump’s goal of making the U.S. more competitive isn’t bad, but he needs to stop using bad tools. Tariffs… raise costs for American manufacturers and prices for American consumers. Tariff Man needs to cool his jets…

Fall 2018 Econ 101b Exam: U.C. Berkeley

School of Athens

We expect that this will take you 90 minutes—but we will not kick you out after that time span… Open book, open devices, open internet—everything except conversing interactively with another Turing-Class entity… Do your work in your bluebook… Be calm: from your performance in the course so far, we are confident that you have (largely) got this…

Good luck!

Write your name, your section number, and your section leader on the front and at the top of the first page of your bluebook.

Make the first page of your bluebook an answer page for parts A and B so that we can quickly grade the exam—on that page write “A1:”, “A2:”, “A3:…”, etc., and “B1:”, “B2:”, “B3:”, etc., on successive rows of the page, and then write the answer you pick or the quantity you calculate next to each label…


Solow Growth Model

We have the Solow Growth Model (SGM) system of equations:

$ \frac{d\left(L_t\right)}{dt} = nL_t $ :: labor-force growth equation
$ \frac{d\left(E_t\right)}{dt} = gE_t $ :: efficiency-of-labor growth equation
$ \frac{d\left(K_t\right)}{dt} = sY_t – \delta{K_t} $ :: capital-stock growth equation
$ Y_t = \left(K_t\right)^{\alpha}\left(L_tE_t\right)^{1-\alpha} $ :: production function


Business Cycle Models

The key filing system and checklist to use in understanding how an economy subject to business cycle shocks behaves in both the flexible-price and sticky-price models is our IS Curve equation:



  • $ Y^* $ is the level of potential output
  • $ Y $ is the level of national income and product
  • $ \mu $ is the so-called Keynesian multiplier
  • $ c_o $ is our measure of consumer confidence
  • $ I_o $ is our measure of corporate investment committe optimism—of business “animal spirits”
  • $ G $ is the level of government purchases
  • $x_f $ is the responsiveness of exports to a change in foreigners’ incomes
  • $ Y^f $ is national income and product abroad
  • $ x_{\epsilon} $ is the responsiveness of exports to a shift in the exchange rate
  • $ {\epsilon}_o $ is foreign exchange speculators’ assessment of the long-term fundamental value of the exchange rate $ \epsilon $
  • $ {\epsilon}_r $ is the responsiveness of the exchange rate to the differential between foreign and domestic interest rates
  • $ r^f $ is the foreign interest rate
  • $ I_r $ is the responsiveness of investment to the domestic real interest rate $ r $
  • $ r $ is the long-term risky real domestic interest rate
  • $ c_y $ is the marginal propensity to consume
  • $ t $ is the marginal tax rate on income
  • $ im_y $ is the marginal propensity to import

Plus the other equations and variables of the business-cycle model:

  • $ \mu = \frac{1}{1-c_y(1-t)+im_y} $ is the Keynesian multiplier
  • $ r = i – \pi + \rho $ is the interest-rate determination equation
  • $ C = c_o + c_y(1-t)Y $ is the consumption function
  • $ I = I_o – I_{r}r $ is the level of investment
  • $ IM = im_y{Y} $ is the level of imports
  • $ GX = x_fY^f + x_{\epsilon}{\epsilon} $ is the level of gross exports
  • ε = εo + εr(r – rf) is the exchange rate
  • $ Y = C + I + G + (GX – IM) $ is national income and product circular-flow
  • $ i $ is the short-term safe nominal interest rate that the central bank controls
  • $ π $ is the inflation rate
  • $ \rho $ is the risk and term premium financial markets charge for lending long to risky businesses rather than lending short to a stable government possessing exorbitant privilege

Recall that the key difference between the flexprice and the sticky-price versions of our business-cycle model is that:

  • in the flexprice version national income and product Y is always in equilibrium equal to potential output Y*: the real wage quickly adjusts to make production equal to potential; the price level quickly adjusts to make aggregate demand and spending equal to production; the real interest rate quickly adjusts to balance the flow-of-funds through financial markets.

  • in the sticky-price version none of these three prices move quickly and substantially enough to play a significant role in pushing the economy to its short-run equilibrium. Instead, rising or falling inventories induce firms to fire or hire people which decreases or increases production and incomes until inventories are stable and aggregate demand equals national income and product. Potential output is nowheresville in the sticky-price version.


Part A: Multiple Choice Questions

2 mins each

1. Long-Run Capital-Worker Ratio

If the model parameters s, n, g, α, and δ remain constant at their initial time-0 values, toward what path is output-per-worker $ K_t/L_t $ converging in the long run? Write “A1:” followed by the letter of the correct answer in your bluebook:

A $ \lim\limits_{t\to\infty}\left(\frac{K_t}{L_t}\right) = \left(\frac{s}{n+g+\delta}\right)\left(E_0{e^{gt}}\right) $

B $ \lim\limits_{t\to\infty}\left(\frac{K_t}{L_t}\right) = \left(\frac{s}{n+g+\delta}\right)^{\frac{1}{1-\alpha}}\left(E_0{e^{gt}}\right) $

C $ \lim\limits_{t\to\infty}\left(\frac{K_t}{L_t}\right) = \left(\frac{s}{n+g+\delta}\right)^{\frac{\alpha}{1-\alpha}}\left(E_0{e^{gt}}\right) $

D $ \lim\limits_{t\to\infty}\left(\frac{K_t}{L_t}\right) = \left(\frac{s{\alpha}}{n+g+\delta}\right)\left(E_0{e^{gt}}\right) $

E none of the above/cannot be determined from the information given


2. An Increase in Population Growth and Savings

If, in a SGM economy, the savings rate s and the population growth rate n both increase by the same proportional amount, the steady-state balanced-growth path values of capital per worker will:

A. increase

B. decrease

C. stay the same

D. increase unless both (a) capital is completely durable and does not depreciate and (b) the efficiency-of-labor is absolutely constant

E. none of the above/cannot be determined from the information given


3. An Increase in the Production Function Parameter $ \alpha $

Comparing two SGM economies with otherwise-identical parameter values, the one with a higher value of the production function parameter $ \alpha $ will have:

A. faster convergence to its steady-state balanced-growth path and a higher level of output per worker along its steady-state balanced-growth path

B. faster convergence to its steady-state balanced-growth path and a lower level of output per worker along its steady-state balanced-growth path

C. the same speed of convergence to its steady-state balanced-growth path and a higher level of output per worker along its steady-state balanced-growth path

D. slower convergence to its steady-state balanced-growth path and a lower level of output per worker along its steady-state balanced-growth path

E. none of the above/cannot be determined from the information given


4. Malthusian Economies: $ \alpha $

Comparing two Malthusian economies that are both on their steady-state balanced-growth paths and that otherwise have identical parameter values and identical initial values of the efficiency-of-labor at time zero Eo, the one with a higher level of the parameter h describing how rapidly productive ideas are generated will:

A. have a faster-growing population but the same level of output-per-worker than the other

B. have a faster-growing population and a faster growing level of output-per worker than the other

C. have a faster-growing population and a slightly-higher level of output-per-worker than the other

D. have a faster-growing population and a much higher level of output-per-worker than the other

E. none of the above/cannot be determined from the information given


5. Malthusian Economies

The failure of all the useful and productive ideas developed by humanity over the course of the long Agrarian Age—from 5000 BC to 1800 AD—to produce any significant boost to the standard of living of the typical human is primarily due to:

A. the failure of legal systems to provide sufficient protection for patents and copyrights

B. the strong positive relationship between standards of living and population growth

C. wars that kept the capital stock from growing sufficiently rapidly

D. the fact that it was much more rewarding for smart and aggressive people with resources to focus their energy on the win-lose struggle to make domination more effective than on the win-win task of making production more efficient

E. none of the above/cannot be determined from the information given


6. Malthusian Economies

In a Malthusian economy in which the ideas stock H grows at a proportional rate h, in which the natural-resource stock N is constant, and in which the efficiency-of-labor E is given by:

$ E_t = \left(H_t\right)^\left(\frac{\gamma}{1+\gamma}\right)\left(\frac{N_t}{L_t}\right)^\left(\frac{1}{1+\gamma}\right) $

Suppose the economy is initially on its steady-state balanced-growth path, and then the rate of generation of ideas parameter h undergoes a sudden, immediate, discontinuous, and permanent upward jump. After this jump, along this economy’s balanced-growth path:

A. the population growth rate n will be less than $ \gamma $ times the growth rate h of the ideas stock

B. the population growth rate n will be the same as $ \gamma $ times the growth rate h of the ideas stock

C. the population growth rate n will be more than $ \gamma $ times the growth rate h of the ideas stock

D. the population growth rate n will be greater than the growth rate h of the ideas stock if $ \gamma > 1 $, and the population growth rate n will be less than the growth rate h of the ideas stock if $ \gamma < 1 $

E. none of the above/cannot be determined from the information given


7. Divergence

Suppose that we are trying to account for the 49-to-1 divergence in productivity levels and living standards across the globe today using the SGM, and assuming that economies are on their steady-state balanced-growth paths. Assume also that divergence across economies in capital-output ratios is perfectly correlated with divergence in efficiency-of-labor levels, and that all countries now are equal in their labor force growth, efficiency-of-labor growth, and depreciation rates. If the capital share parameter in the production function $ \alpha = 1/3 $ and if the divergence in efficiency-of-labor levels across countries is 7-to-1, how large a divergence in savings rates would be needed to account for observed global cross-country inequality?

A. 7-to-1

B. 49-to-1

C. $ \sqrt{7}$-to-1

D. none: the divergence in efficiency of labor levels does the job

E. none of the above/cannot be determined from the information given


8. Divergence

Suppose again that we are trying to account for the 49-to-1 divergence in productivity levels and living standards across the globe today using the SGM, and assuming that economies are on their steady-state balanced-growth paths. Assume also that divergence across economies in capital-output ratios is perfectly correlated with divergence in efficiency of labor levels, and that all countries now are equal in their labor force growth, efficiency of labor growth, and depreciation rates. If the capital share parameter in the production function $ \alpha = 2/3 $ and if the divergence in capital-output levels across countries is 7-to-1, how large a divergence in efficiency-of-labor levels would be needed to account for observed global cross-country inequality?

A. 7-to-1

B. 49-to-1

C. $ \sqrt{7}$-to-1

D. none: the divergence in capital-output levels does the job

E. none of the above/cannot be determined from the information given


9. Divergence…

What economist Richard Baldwin calls the “Ancient Seven” economies—China; what are now India and Pakistan and Bangladesh; what are now Iraq and Syria; Iran; what is now Turkey; what are now Italy and Greece; and Egypt—dominated the pre-Industrial Revolution world in terms of their shares of total world product predominantly because:

A. they had uniquely advantageous positions located on major world trade routes, so they had higher levels of the efficiency-of-labor

B. they had more and more fertile agricultural land—much more ample stocks of natural resources—than anywhere else

C. their high civilizations were more sophisticated and generated more ideas useful for production than anyplace else, so they had higher levels of the efficiency-of-labor

D. all of the above are not implausible possible scenarios

E. none of the above/cannot be determined from the information given


10. An Adverse Supply Shock

Suppose, in the flexible-price business cycle model, an adverse supply shock reduces potential output by an amount $ {\Delta}Y^* $. Suppose nothing else in the economic environment changes. Suppose that there are no changes in fiscal policy to government purchases or the tax rate.

Which of the following happens to the economy?

A. Consumption spending goes down by $ {\Delta}C = (c_y – im_y){\Delta}Y^* $

B. Investment spending goes down by $ {\Delta}I = $ $ -\frac{I_r}{I_r + x_{\epsilon}{\epsilon}_r}{\Delta}Y^* $

and the interest rate goes up by: $ {\Delta}r = \frac{{\Delta}Y^*}{I_r + x_{\epsilon}{\epsilon}_r} $

C. The fall in national income forces a reduction in government purchases of $ {\Delta}G = – {\Delta}Y^* $

D. The interest rate goes up by $ {\Delta}r = \frac{{\Delta}Y^*}{\mu(I_r + x_{\epsilon}{\epsilon}_r)} $

E. none of the above/cannot be determined from the information given


11. A Decline in Business Animal Spirits

In the flexprice IS Curve equation:


with the Keynesian multiplier:

$ \mu = \frac{1}{1 – (1-t)c_y + im_y} $

holding other things equal, a decrease in investor “animal spirits”—a fall in the parameter $ I_o $ in the equation determining the level of business investment spending—will cause:

A. a fall in investment spending I, no change in the domestic interest rate, no change in exports or government purchases, but a fall in imports and consumption spending

B. a fall in investment spending I, a rise in the domestic interest rate r to generate the fall in investment spending, a fall in the value of the dollar—the home currency—a rise in exports, and no change in government purchases, imports, or consumption spending

C. a fall in investment spending I, a fall in the domestic interest rate r, a fall in the value of the dollar—the home currency—a rise in exports, and no change in government purchases, imports, or consumption spending

D. a fall in investment spending I, a rise in the domestic interest rate r to generate the fall in investment spending, a rise in the value of the dollar—the home currency—a fall in exports, and no change in government purchases, imports, or consumption spending

E. none of the above/cannot be determined from the information given


12. The “Neutral” Rate of Interest

As Federal Reserve Bank of New York President John Williams defines it, the “neutral” rate of interest is the rate of interest at which total spending—aggregate demand—is equal to potential output. It is thus the same as the equilibrium interest rate in the flexible price model. Which of the following statements about influences on the neutral interest rate is correct?

A. a rise in animal spirits, a rise in foreign interest rates, and a rise in confidence in the long-run fundamental value of the domestic currency—the dollar—will all raise the neutral interest rate

B. a rise in animal spirits, a rise in foreign interest rates, and a rise in the value of the exchange rate defined as the value of foreign currency $ \epsilon $ will all raise the neutral interest rate

C. a rise in animal spirits, a rise in foreign interest rates, and a rise in confidence in the long-run fundamental value of the domestic currency—the dollar—will all lower the neutral interest rate

D. a rise in animal spirits, a rise in foreign interest rates, and a rise in the value of the exchange rate $ \epsilon $ will all lower the neutral interest rate

E. none of the above/cannot be determined from the information given


13. Offsetting Fiscal Contraction

In one of his early weekly lunches in 1993 with Federal Reserve Chair Alan Greenspan, the newly installed Treasury Secretary, Lloyd Bentsen, expressed concern that the 2% of GDP fiscal contraction planned by President Clinton in order to try to to balance the budget might send the economy into recession.

Greenspan expressed a willingness to keep interest rates lower than he would have done in the baseline, no-deficit reduction scenario in order to avoid this risk.

Suppose we model this as a reduction in G by an amount $ {\Delta}G = – 2 $ (% of GDP). Suppose that the Keynesian multiplier $ \mu = 3 $, and that the parameters are:

  • $ I_r = \frac{2}{3}, $
  • $ {\epsilon}_r = \frac{1}{3}, $
  • $ x_{\epsilon} = 1 $.

By how much would Alan Greenspan have had to take steps to lower r below its baseline path in order to have kept his promise?

A. $ \frac{2}{3} $%-points

B. 6%-points

C. 2%-points

D. 3%-points

E. none of the above/cannot be determined from the information given


14. Foreign Monetary Policy

If foreign governments reduce their interest rates and by so doing induce a boom abroad that raises total incomes abroad, the consequence for the domestic economy in the sticky-price model is likely to be:

A. a decrease in the value of the dollar and an increase in exports, consumption spending, and national product

B. an increase in the value of the dollar and a reduction in exports, but an increase in investment spending and no change in the level of consumption spneding and national product

C. an increase in the value of the dollar and a reduction in exports, consumption spending, and national product

D. a decrease in the value of the dollar and an increase in exports, but a decrease in investment spending and no change in the level of consumption spneding and national product

E. none of the above/cannot be determined from the information given


15. Phillips Curve

In an economy described by the so-called Phillips Curve equation:

       $ {\pi_t} = {\pi_t}^e – \beta\left(u_t – u^*\right) $

where inflation expectations are adaptive:

$ {\pi_t}^e = \pi_{t-1} $

a central bank that pushes or lets the unemployment rate rise and stay above its NAIRU for a long period of time will probably:

A. see a higher rate of inflation at the end of the period than at the start

B. see a lower rate of inflation at the end of the period than at the start

C. see about the same rate of inflation at the end of the period than at the start

D. none of the above/cannot be determined from the information given


Part B: Short Calculation Questions

Five minutes each

1. Long-Run Capital-Output Ratio

Suppose that in a Solow growth model economy the values of s, n, g, α, and δ are 0.18, 0.01, 0.02, 0.5, and 0.03 and remain constant, and suppose further that in year 0 $ E_o = 1, L_o = 1, K_o = 9 $. What is the value of the capital-output ratio $ K_t/Y_t $ in year 100? Write “B1:” and then the correct value in your bluebook.


2. An Increase in Savings

Suppose that in a SGM economy the production function parameter $ \alpha = 0.25 $. If the savings rate s quadruples, by what factor will the level of output per worker along the steady-state balanced-growth path be? Write “B2:” and then the correct value in your bluebook.


3. Sticky-Price Monetary Offset

Suppose that in a sticky-price economy the multiplier is two, a one-percentage point increase in the domestic long-term risky real interest rate discourages 200 billion of annual investment, and that foreigners raise and lower their interest rates in tandem with the domestic central bank. Suppose that the President and the Congress raise annual government purchases by 400 billion dollars. By what amount would the central bank have to change the long-term risky real interest rate to keep that expansion of government purchases from changing the level of national income and product? Write “B3:” and then the correct value in your bluebook.


4. Sticky-Price Financial Crisis

Between the start of 2007 and the end of 2008 the wedge between the policy interest rate the Federal Reserve controls and the long-term risky real interest rate that matters in the IS equation rose by 15 percentage points. Suppose that similar effects were happening abroad so that the interest rate differential between home and abroad did not change. Suppose further that a 1%-point rise in the interest rate discourages 100 billion of annual investment, that a 1%-point shift in the domestic-foreign interest rate differential causes a 5% shift in the value of foreign currency, and that a 1% increase in the value of foreign currency raises annual exports by 30 billion. Suppose that the multiplier was 2.5.

If the U.S. government had reacted to 2007-8 the way it reacted to 1929-1933—that is, had it done nothing—what would have been the effect, in billions, on annual national income and product?


Part C: Model Applications and Extensions

10 minutes each

1. A “Strong Dollar”

My boss’s boss back in 1995, Clinton Administration Treasury Secretary Robert E. Rubin liked to say “a ‘strong dollar’ is in America’s interest”. In our business-cycle framework, a strong dollar is a low value of the exchange-rate-value-of-foreign-currency parameter $\epsilon $, which is itself determined by:


A “strong dollar” can thus be generated by any of:

  1. A low value of $ {\epsilon}_o $, when foreign exchange speculators are confident about the fundamental value of the home currency
  2. A low level of $ r^f $, interest rates abroad
  3. A high level of $ r $, interest rates at home

(a) In the flexprice model, what are the consequences of a “strong dollar” generated through channel (1) or channel (2) on the economy? Use the symbols for parameters (i.e., $ I_r $), to specify what are the effects on economic variables of interest of a dollar stronger via a $ {\Delta}{\epsilon}_o = – 0.1 $ and via a $ {\Delta}r^f = – 0.02 $. (Recall that in the flexible price model, r is not something that can vary except as a result of some other change in the economic environment or in the fiscal-policy variables G and t.)

(b) In the sticky-price model, what are the consequences of a “strong dollar” generated through channel (1), (2), or (3) on the economy? Use the symbols for parameters (i.e., $ I_r $), to specify what are the effects on economic variables of interest of a dollar stronger via a $ {\Delta}{\epsilon}_o = – 0.1 $, via a $ {\Delta}r^f = – 0.02 $, or via a $ {\Delta}r = +0.02 $.

(c) Finally, what adjustments/additions/corrections to the models of this course occur to you that might make Bob Rubin’s “strong dollar” mantra a more correct belief than your analyses in (a) and (b) suggest?



2: Solow Growth Model

In 1977 China’s level of real national product per capita was 909 dollars per person a year. Forty years later, in 2017, it was 15200 dollars per person a year.

  1. By what factor was China’s level of output per capita greater in 2017 than it had been in 1977?

  2. If the production function parameter $ \alpha = 1/3 $ happened to be true for China over this period, how much of a multiplicative increase in the capital output ratio would have been needed to drive such growth?

  3. If the production function parameter $ \alpha = 1/2 $ happened to be true for China over this period, how much of a multiplicative increase in the capital output ratio would have been needed to drive such growth?

  4. If the production function parameter $ \alpha = 2/3 $ happened to be true for China over this period, how much of a multiplicative increase in the capital output ratio would have been needed to drive such growth?

  5. In fact, China’s capital output ratio doubled between 1977 and 2017. If the production function parameter $ \alpha = 2/3 $ happened to be true for China over this period, how fast did the efficiency of labor grow on average in China from 1977 to 2017?

  6. Suppose you believe that China will no longer be able to raise its capital-output ratio, but that it will still be able to increase its efficiency of labor as rapidly as it has over the past forty years. What would you forecast for the growth rate of output per capita in China over the next generation?

  7. Suppose you believe that China will no longer be able to raise its capital-output ratio, and that—because China is now a middle income country—it will only be able to exceed the 1.6% per year growth rate of the efficiency of labor in the global north by half as much in the future as it has over the past forty years. What would you forecast for the growth rate of output per capita in China over the next generation?

  8. Can you think of something to say about this that it is important for Xi Jinping to either learn (if he does not know it already) or keep constantly in the front of his mind (if he does know it already)?


Part D: Essays

10 minutes each; 150 words maximum each

1. The Current American Macroeconomy

Suppose you are Kevin Hassett, Chair of the President’s Council of Economic Advisers. President Donald Trump comes to you and asks if you think he should fire Federal Reserve Chair Jay Powell because interest rates are going up, the value of foreign currencies like the renminbi, the yen, the euro, and the pound are falling, and the trade deficit is increasing. Using the ideas you have learned in this course, write what you would say to him to try to guide him to an accurate understanding of the current state of the American macroeconomy. We take the word limit seriously. So think, write that many words, and then stop.


2. Italy Today

Earlier this week, the extremely sharp Adam Tooze wrote:

More than 32 percent of Italy’s young people are unemployed. The gloom, disappointment and frustration are undeniable. For the commission to declare that this is a time for austerity flies in the face of a reality that for many Italians is closer to a personal and national emergency…. The Bank of Italy and the Peterson Institute of International Economics, warn that Italy is caught in a trap: Anxieties about debt sustainability mean that any stimulus has the perverse effect of driving up interest rates, squeezing bank lending and reducing growth…

Think in terms of our sticky-price model. What do you believe would have to be true about the interrelationships of the economic variables in the model for the BoI and the PIIE’s worries to be correct?

We take the word limit seriously. So think, write that many words, and then stop.


#highlighted #berkerley #economicgrowth #macroeconomics

“Lord, When Saw We Thee an Hungred, or A Thirst, or a Stranger, or Naked, or Sick, or in Prison, and Did Not Minister Unto Thee?”

How did Evangelicals miss the memo that God saves you later only if you save the image of God in your neighbor today?: “Lord, when saw we thee an hungred, or a thirst, or a stranger, or naked, or sick, or in prison, and did not minister unto thee?”: Ronald Brownstein: Trump’s Coalition Is Cracking: “Evangelical Christians this year comprised fully 45% of all white voters without a college degree, a substantial portion of the total electorate. By contrast, evangelicals represented only one-fourth of college-educated white voters. (In 2016, the exit polls found that evangelicals constituted slightly larger shares of each group.) In all of the southern states where the question was asked this year, evangelicals represented a majority of working-class white voters, including fully two-thirds in Georgia and Tennessee. Evangelicals were also a majority of white working class voters in West Virginia and Indiana and exactly half in Missouri…

It’s not the white working class who have been totally grifted by Trump—it’s those who call themselves Evangelicals:

Trump s coalition is cracking CNNPolitics

#shouldread #orangehairedbaboons 

Fairly Recently: Must- and Should-Reads, and Writings… (December 10B, 2018)


  1. Reasoning—Individual, Social, and Societal: I am all but certain to never teach a course on: Reasoning—Indivdual, Social, and Societal. But if I were to teach such a course, would this be the best reading list? And if not these readings, what would be better replacements?…

  2. Hoisted from the Archives from 2004: Mark Kleiman: Avodim Hayyinu l’pharoh b’Mitzrayim: “Linked to the commandments in Deuteronomy, that phrase comes to mean: ‘We were slaves’ and therefore must never, never, ever act like slaveowners. That makes sense of the empirical link between Judaism and liberalism. No, there’s no reason to think that the ‘liberal’ viewpoint on any given policy issue is superior to the “conservative” one. With respect to crime, which is my own study, I’d have to say that the liberal tendency over the past half-century has mostly pointed toward the wrong answers…. But…

  3. Hoisted from the Archives: “How an Economy Can Live Beyond Its Means on Its Wits…”: Confront economists’ theories of depressions and what (if anything) the government should do about them and you find yourself immediately confronted with what look to be at least seven different theories: Monetarism… Wicksellianism… Minskyism… Austrianism… Vulgar Keynesianism… Hickianism… Post-Keynesianism…

  4. Monday Smackdown: Ezra Klein Smacks Down Paul Ryan as a Grifter, and Himself for a Griftee…: Very welcome to see: Remember: Fool me once, shame on you; fool my twice, shame on me: Ezra Klein: Speaker Paul Ryan Retires: His Legacy Is Debt and Disappointment: “I took Ryan seriously…. I covered the arguments Ryan made, the policies he crafted, and I treated them as if they offered a guide to how Republicans would govern. I listened…. Now, as Ryan prepares to leave Congress, it is clear that his critics were correct and a credulous Washington press corps—including me—that took him at his word was wrong…. Ryan proved himself and his party to be exactly what the critics said: monomaniacally focused on taking health insurance from the poor, cutting taxes for the rich, and spending more on the Pentagon. And he proved that Republicans were willing to betray their promises and, in their embrace of Trump, violate basic decency to achieve those goals…

  5. Blogging: What to Expect Here…: The purpose of this weblog is to be the best possible portal into what I am thinking, what I am reading, what I think about what I am reading, and what other smart people think about what I am reading: “Bring expertise, bring a willingness to learn, bring good humor, bring a desire to improve the world—and also bring a low tolerance for lies and bullshit…” — Brad DeLong…

  6. Monday Smackdown/Hoisted from 2008: Why We Called Donald Luskin “The Stupidest Man Alive”: Cargo-Cult economics. Or perhaps “TV economics”. Going through motions sorta-kinda like what economists do without understanding why or what the calculations mean…

  1. Kate Bahn: Understanding the Importance of Monopsony Power in the U.S. Labor Market: “In a dynamic monopsony model, so-called search frictions—including imperfect information and other constraints to job mobility… would give employers more power to set wages below competitive levels, while still maintaining a sufficient supply of workers…. Doug Webber tests the hypothesis of widespread dynamic monopsony and whether search frictions appear to maintain low wages across the U.S. labor market in his 2015 paper, ‘Firm market power and the earnings distribution’. Webber finds pervasive monopsony across the labor market, with the key finding that less monopsony power would lead to less income inequality…

  2. Elizabeth Jacobs: California’s Paid Family Leave Policy Is Decreasing Nursing Home Use and Saving Medicaid Dollars: “Kanika Arora and… Douglas Wolf provide the first-ever empirical study assessing the impact of paid family and medical leave… utiliz[ing] longitudinal, state-level data to assess whether California’s state paid family and medical leave policy led to a decrease in nursing home utilization. California enacted a comprehensive paid leave policy in 2004, providing access to six weeks of leave for both new parents and family caregivers…. The estimated effect of paid family and medical leave on nursing home utilization in California is a decline of more than 11 percent in the share of the elderly residing in nursing homes…

  3. Like wood fires and nuclear fusion, ideology is a very bad master. But also, like wood fire in nuclear fusion, it is a most excellent servant. Therefore I cannot sign-on for Jerry Taylor‘s decision to abandon “ideology“. The task, I think, is to make ideologies useful by making them self reflective. After all, if a libertarian founder like John Stuart Mill can say that Positive Liberty is essential—that the British working class of his day was “imprisoned” in spite of all their negative liberty by Malthusian poverty, there is ample space for a libertarianism that keeps its good focus on human choice, potential, and opportunity without blinding itself to a great deal of reality: Jerry Taylor: The Alternative to Ideology: “When we launched the Niskanen Center in January 2015, we happily identified ourselves as libertarians… heterodox libertarians… left-libertarianism concerned with social justice (a libertarian perspective that I’ve defended in debates with more orthodox libertarians here and here)…

  4. The website for Zucman, Wier, and Torslav on on missing profits from tax avoidance and tax evasion (yes, I have decided I should spend some time listing paper authors in reverse alphabetical order): Gabriel Zucman: The Missing Profits of Nations: [Working paper][1], June 2018. [Online appendix][2], June 2018. [Presentation slides][3], June 2018…

  5. Antonio Fatás: Europe’s fiscal policy doom loop: “The damage done by procyclical fiscal policy in the euro area between 2010 and 2014 is likely to be even larger…. Fiscal policymakers… created a ‘doom loop’, with unfounded pessimism feeding into policy… the consequences of those policies increasing pessimism… hysteresis, permanently reducing GDP…

  6. Go watch the video: Equitable Growth: Building a New Consensus on #Antitrust Reform

  7. You cannot understand either globalization or international migration without knowing the history. David and Jon know the history very very well: David S. Jacks and John P. Tang: Trade and Immigration, 1870-2010: “global merchandise trade and immigration from 1870 to 2010. We revisit the reasons why these two forces moved largely in parallel in the decades leading up to World War I, collapsed during the interwar period, and then rebounded (but with much more pronounced growth in trade than in immigration)…

  8. Absolutely remarkable: Erik Larson and Christopher Cannon: Madoff’s Victims Are Close to Getting Their $19 Billion Back: “A decade after Bernard Madoff was arrested for running the world’s biggest Ponzi scheme, the bitter fight to recoup investors’ lost billions has astounded experts and victims alike… #finance

  9. I have enormous respect for Ken, but I think he is largely wrong here. In any dystopian or failed state, why would you want to accept RogoffCoin? or DeLongCoin? Or any of the other ICOs coming down the pike. Yes, there is a space for a blockchain-supported anonymous currency. But the currency that will be adopted will be one that has substantial backing from somewhere—either some large organization with real asset and payments that decides it want to use it (a “cameralist” valuation), or a central focal point (which BitCoin might hold). I can see BitCoin being worth a hundred dollars in the long run because having been first mover is a potential focal point. I can’t see anything else having value in the long run. It is not “cryptocurrency coins” that are “lottery tickets that pay off in a dystopian future”; it is (maybe) BitCoin. After all, the South Sea Company had detected a true market opportunity—there would be durable demand for standardized Gilts. But, as Ken says, “the private sector may innovate, but in due time the government regulates and appropriates”: the profits were reaped not by the South Sea Company or any of its competitors but by the British Treasury. In the meantime, of course, there are Greater Fools for Fools to sell to, and so folly has a chance of looking wise ex post: Kenneth Rogoff: Betting on Dystopia: “The right way to think about cryptocurrency coins is as lottery tickets that pay off in a dystopian future where they are used in rogue and failed states, or perhaps in countries where citizens have already lost all semblance of privacy. That means that cryptocurrencies are not entirely worthless…

  1. Josh Zumbrun: IMF departing chief economist warns on U.S. growth – MarketWatch: “Mr. Obstfeld said Asian and European economic data disappointed in the third quarter. In Japan and Germany, for example, gross domestic product shrunk. The U.S. will likely post stronger growth, but he doesn’t expect it to avoid the global downdraft entirely. ‘For the rest of the world there seems to be some air coming out of the balloon and that, I think, will come back and also affect the U.S.’, he said…

  2. Tim Duy: Unpleasant: “The situation on Wall Street is, well, unpleasant, and it in turn is creating considerable uncertainty about the outlook for monetary policy…. Powell & Co.[‘s]… outlook is fundamentally hawkish as it describes policy as continuing to tighten even as growth decelerates. Moreover, incoming data remains supportive of that outlook. This isn’t really a problem for rate hikes next year; the data could cut either way by March. It is a bit of a challenge for next week’s meeting as the Fed is loath to appear reactive to markets alone…

  3. Paul Krugman: The Art of the Imaginary Deal: “China is not a good actor in the world economy. It engages in real misbehavior, especially with regard to intellectual property…. So there is a case for toughening our stance on trade. But… in concert with other nations… and… clear objectives. The last person you want to play hardball here is someone who doesn’t grasp the basics of trade policy, who directs his aggressiveness at everyone… and who can’t even give an honest account of what went down in a meeting. Unfortunately, that’s the person who’s now in charge…

  4. Steve Benen: Wisconsin and the ‘If Only Those People Weren’t Here’ Phenomenon: “One of the most powerful officials in Wisconsin’s state government suggested that… certain parts of his home state [should] not count…. After Hillary Clinton won the presidential election’s popular vote…. All Americans count, the argument went, but maybe Americans in California and New York shouldn’t…. Byron York… Obama’s… ‘sky-high ratings among African-Americans make some of his positions appear a bit more popular overall than they actually are’…