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September 22, 2012

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Paul Krugman: Hating on Ben Bernanke

Posted: 17 Sep 2012 12:33 AM PDT

More evidence that Mitt Romney's "economic policy is evidently being dictated by extremists":

Hating on Ben Bernanke, by Paul Krugman, Commentary, NY Times: Last week Ben Bernanke, the Federal Reserve chairman, announced a change in his institution's recession-fighting strategies. ... The ... announcement included another round of quantitative easing, this time involving mortgage-backed securities. The big news, however, was the ... Fed ... more or less promising that it won't start raising interest rates as soon as the economy looks better, that it will hold off until the economy is actually booming and (perhaps) until inflation has gone significantly higher.
The idea here is that by indicating its willingness to let the economy rip for a while, the Fed can encourage more private-sector spending right away. Potential home buyers will be encouraged by the prospect of moderately higher inflation that will make their debt easier to repay; corporations will be encouraged by the prospect of higher future sales; stocks will rise, increasing wealth, and the dollar will fall, making U.S. exports more competitive.
This is very much the kind of action Fed critics have advocated..., although far from being a panacea for the economy's troubles (a point Mr. Bernanke himself emphasized).
And Republicans ... have gone wild, with Mr. Romney joining in the craziness. His campaign issued a news release denouncing the Fed's move as giving the economy an "artificial" boost — he later described it as a "sugar high"...
Mr. Romney's language echoed that of the "liquidationists" of the 1930s, who argued against doing anything to mitigate the Great Depression. Until recently, the verdict on liquidationism seemed clear: it has been rejected and ridiculed not just by liberals and Keynesians but by conservatives too, including none other than Milton Friedman. "Aggressive monetary policy can reduce the depth of a recession," declared the George W. Bush administration in its 2004 Economic Report of the President. And the author of that report, Harvard's N. Gregory Mankiw, has actually advocated a much more aggressive Fed policy than the one announced last week.
Now Mr. Mankiw is allegedly a Romney adviser — but the candidate's position on economic policy is evidently being dictated by extremists who warn that any effort to fight this slump will turn us into Zimbabwe, Zimbabwe I tell you. ...
So last week we learned that Ben Bernanke is willing to listen to sensible critics and change course. But we also learned that on economic policy, as on foreign policy, Mitt Romney has abandoned any pose of moderation and taken up residence in the right's intellectual fever swamps.

Fed Watch: Now We Wait

Posted: 17 Sep 2012 12:24 AM PDT

Tim Duy:

Now We Wait, by Tim Duy: The Federal Reserve followed through largely as expected last week, adopting a very new policy regime:

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month....

...If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.

The Fed delivered open-ended quantitative easing. The end of the program is to be a function of economic outcomes, not arbitrary dates. They did not specify macroeconomic targets, such as a 7% unemployment rate, but I think few expected the Fed to lock themselves into such a specific number.

There has already been much commentary on the decision (I was otherwise engaged that day, so the whirlwind passed me by). See, for example, Mark Thoma, FT Alphaville, Gavyn Davies, FT Money Supply, Scott Sumner, and Econbrowser. I would add that this policy shift indicates that Federal Reserve Chairman Ben Bernanke has repudiated at least two of his earlier views.

The first is his belief that the stock of bond purchases was more important than the flow. Obviously, the focus is now on the flow of purchases, reflecting the importance of managing expectations in the implementation of policy. The shift to a flow-based policy removes the unnecessary uncertainty surrounding the intent of policymakers that was associated with previous, stock-based policy.

Second, notice that with his new found focus on the importance of weak labor market conditions, Bernanke returns to his former self. It has long been something of a mystery of what happened to the Bernanke who offered advised to the Bank of Japan back when he was a Federal Reserve Governor. Bernanke even felt it necessary to defend himself against attacks that he had abandoned previous positions:

So the very critical difference between the Japanese situation 15 years ago and the U.S. situation today is that Japan was in deflation,and, clearly, when you're in deflation and in recession, then both sides of your mandates, so to speak, are demanding additional accommodation. In this case, it's—we are not in deflation, we have an inflation rate that's close to our objective. Now, why don't we do more? Well, first I would again reiterate that we are doing a great deal; policy is extraordinarily accommodative...I guess the question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased reduction—a slightly increased pace of reduction in the unemployment rate?

Back in April, Bernanke stressed that the key factor that eliminated the need for additional QE was the lack of a deflationary threat. Bernanke has apparently abandoned that view, and now pursues an even more aggressive QE program than imagined in the spring on the basis of labor market conditions. Bernanke appears to have now come full circle on the role of monetary policy in alleviating economic distress. A long, strange trip, to be sure. And one wonders if he would have made it back full circle without the persistent critiques of the certain elements of the blogging community to push him along.

Now, of course, the question is will it work? This is, of course, an experiment. I tend to think that monetary policy would be much more effective if backed by a rational fiscal policy, but at the moment central banks in both the US and Europe left to do the job by themselves. I would add that the central bank action comes at a critical time, with a weakening global economy clearly starting to drag on US activity. Which brings us to a quick data review.

First off, note that exports growth continues to decelerate:

Exports

The impact has already been evident in manufacturing surveys:

Ismimports

And likely in the core manufacturing data as well:

Coreman

Interestingly, I have seen little commentary on the sharp decline in core manufacturing growth, but on the topic see Barry Ritholtz. The surprise decline in industrial production (partly attributed to the hurricane), could be a warning that something more serious is brewing:

Ip2

I would say on net that the consumer remains subdued. Stripping out autos and gas, retail sales barely budged in August:

Retail

That said, consumer confidence was stronger, helping to close the anomalous gap between confidence on consumer spending growth:

Con

But gas prices continue to rise, which may bite into confidence in future months:

Gas

Higher gas prices will put some upward pressure on headline inflation, which otherwise remains subdued:

Cpi

Higher gas prices and the associated impact on inflation could provide the first test of the Fed's commitment to open-ended QE. The experience of the past few years, in which higher gas prices have been a drag on the economy rather than trigger broader inflation, should have served as a sufficient lesson for the Fed to not reverse course at the tiniest whiff of rising prices.
Finally, initial unemployment claims continue to move sideways, also helped along by the hurricane:

Claims

No evidence of significant labor market improvement yet.
Bottom Line: The Federal Reserve ushered in a new policy regime last week. But will it work? That part remains to be seen. While the appropriate monetary policy given the Fed's expectation of inflation below their target and persistent weakness in the labor market, they are still fighting the effects of uncooperative fiscal policymakers. For now, the best bet is slow and steady underlying growth, with the drag of the external sector offsetting some of the early improvement in housing. Should gas prices continue to rise, the Fed will quickly find their resolve tested. My expectation is that they do not fold easily; rising headline inflation will not trigger a rapid policy reversal as higher gas prices will place an offsetting weight on final demand. I would like to say that the Fed acted in time to prevent a broader slowdown, but the manufacturing data gives me pause. While I certainly see nothing that convinces me that further slowing is inevitable, the ongoing global weakness and the fiscal cliff provide me with plenty of uncertainty heading into the final months of 2012.

Links for 09-17-2012

Posted: 17 Sep 2012 12:06 AM PDT

Summers: Britain Risks a Lost Decade

Posted: 16 Sep 2012 12:55 PM PDT

Larry Summers says Britain needs to change course, or risk prolonged stagnation:

Britain risks a lost decade unless it changes course, by Lawrence Summers, Commentary, Financial Times: It ... is fair to ask economists a fundamental question: what could happen that would cause you to revise your views of how the economy operates and acknowledge that the model you had been using was flawed? As a vigorous advocate of fiscal expansion as an appropriate response to a major economic slump in an economy with zero or near-zero interest rates, I have for the past several years suggested that if the British economy – with its major attempts at fiscal consolidation – were to enjoy a rapid recovery, it would force me to substantially revise my views about fiscal policy and the macroeconomy.
Unfortunately for the British economy, nothing in the past several years compels me revise my views. ...
Britain must change the pace of fiscal consolidation to stand a chance of avoiding a lost decade. Rather than starving public investment, now is the time to add to confidence by making plans for structural reforms to contain the growth of public consumption spending over time. It is also time to take overdue measures to promote exports and, after years of appropriately low investment, to restart housing investment. But when demand is needed for growth and the private sector is hanging back, the first priority must be for the public sector to stop exacerbating the contraction.

If we follow Britain, as many in the "Mitt for President" camp would have us do, we face the same risk.

David Ricardo 'On Machinery'

Posted: 16 Sep 2012 12:01 PM PDT

David Ricardo, in the third edition of his Principles (this is from chapter 31, "On Machinery," 1821), reconsiders how the invention of new machinery affects labor:

Ever since I first turned my attention to questions of political economy, I have been of opinion, that such an application of machinery to any branch of production, as should have the effect of saving labour, was a general good, accompanied only with that portion of inconvenience which in most cases attends the removal of capital and labour from one employment to another. It appeared to me, that provided the landlords had the same money rents, they would be benefited by the reduction in the prices of some of the commodities on which those rents were expended, and which reduction of price could not fail to be the consequence of the employment of machinery. The capitalist, I thought, was eventually benefited precisely in the same manner. He, indeed, who made the discovery of the machine, or who first usefully applied it, would enjoy an additional advantage, by making great profits for a time; but, in proportion as the machine came into general use, the price of the commodity produced, would, from the effects of competition, sink to its cost of production, when the capitalist would get the same money profits as before, and he would only participate in the general advantage, as a consumer, by being enabled, with the same money revenue, to command an additional quantity of comforts and enjoyments. The class of labourers also, I thought, was equally benefited by the use of machinery, as they would have the means of buying more commodities with the same money wages, and I thought that no reduction of wages would take place, because the capitalist would have the power of demanding and employing the same quantity of labour as before, although he might be under the necessity of employing it in the production of a new, or at any rate of a different commodity. ...
These were my opinions, and they continue unaltered, as far as regards the landlord and the capitalist; but I am convinced, that the substitution of machinery for human labour, is often very injurious to the interests of the class of labourers.
My mistake arose from the supposition, that whenever the net income of a society increased, its gross income would also increase; I now, however, see reason to be satisfied that the one fund, from which landlords and capitalists derive their revenue, may increase, while the other, that upon which the labouring class mainly depend, may diminish, and therefore it follows, if I am right, that the same cause which may increase the net revenue of the country, may at the same time render the population redundant, and deteriorate the condition of the labourer. ...
That the opinion entertained by the labouring class, that the employment of machinery is frequently detrimental to their interests, is not founded on prejudice and error, but is conformable to the correct principles of political economy.

However, he goes on to say that this shouldn't be viewed as a call to discourage machinery:

The statements which I have made will not, I hope, lead to the inference that machinery should not be encouraged.  ... The employment of machinery could never be safely discouraged in a State, for if a capital is not allowed to get the greatest net revenue that the use of machinery will afford here, it will be carried abroad, and this must be a much more serious discouragement to the demand for labour, than the most extensive employment of machinery; for, while a capital is employed in this country, it must create a demand for some labour; machinery cannot be worked without the assistance of men, it cannot be made but with the contribution of their labour. By investing part of a capital in improved machinery, there will be a diminution in the progressive demand for labour; by exporting it to another country, the demand will be wholly annihilated.

So, in Ricardo's view, it is a choice between the potential for detrimental effects on labor from the use of new machinery versus even worse effects if the machinery is not used at all. His argument can certainly be questioned, at least in some places, but this is not the positive "lift all boats" theory of growth that is often attributed to Ricardo.

'The Puzzle of the Republican Economists'

Posted: 16 Sep 2012 09:21 AM PDT

Brad DeLong:

... The puzzle of the Republican economists who are plausible candidates for the highest federal office--the Hubbards, the Mankiws, the Rosens, the Taylors, the Feldsteins, the Lazears, and the others--is that the whole point of attaining high federal office is so that one can then make the world a better place. The hours are long. The hours are long. The pay is not that great. The chance of getting slimed and smashed by the political process is high. The food in the White House Mess is not that good. If you sacrifice all of your policy knowledge and commitments so that you can play the Inside Game then you might as well have never been born. Better to stick to your policy guns and if that means that you have to play the Outside Game only, well then, so be it--better to be a knowledgeable choice than an ignorant echo.
As Kurt Vonnegut wrote in his Mother Night: We are who we pretend to be, so we need to be damned careful who we pretend to be.
It is interesting to note that the behavior of the serious Republican economists here--that none of them has been willing to stand up and public and say that the 11-1 vote of the FOMC is even a defensible judgment call--is very similar to the behavior of the moderate Republican senators since… 1993, unwilling to stand up for their policy preferences and make a difference but instead insisting on being echoes of their leadership, and ciphers who might as well not have been there.

I can think of a lot of examples where Paul Krugman and others on the left have been pretty tough on Obama. But I can't think of similar examples on the right, instances where economists like those named above have staked out positions that are highly critical of their party's policies. Can you?

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