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March 25, 2015

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Posted: 25 Mar 2015 12:06 AM PDT

'Macro Wars: The Attack of the Anti-Keynesians'

Posted: 24 Mar 2015 09:06 AM PDT

I have a new column:

Macro Wars: The Attack of the Anti-Keynesians, by Mark Thoma: The ongoing war between the Keynesians and the anti-Keynesians appears to be heating up again. The catalyst for this round of fighting is The Keynesian Illusion by David K. Levine, which elicited responses such as this and this from Brad DeLong and Nick Rowe.
The debate is about the source of economic fluctuations and the government's ability to counteract them with monetary and fiscal policy. One of the issues is the use of "old fashioned" Keynesian models – models that have supposedly been rejected by macroeconomists in favor of modern macroeconomic models – to explain and understand the Great Recession and to make monetary and fiscal policy recommendations. As Levine says, "Robert Lucas, Edward Prescott, and Thomas Sargent … rejected Keynesianism because it doesn't work… As it happens we have developed much better theories…"
I believe the use of "old-fashioned" Keynesian models to analyze the Great Recession can be defended. ...

'The Assumptions Behind the Federal Reserve’s Choice of 2% per Year Were Erroneous'

Posted: 24 Mar 2015 09:03 AM PDT

Brad DeLong:

The Assumptions Behind the Federal Reserve's Choice of 2% per Year Were Erroneous: Focus: ...The decision by the Federal Reserve in the mid-1990s to settle on a 2% per year target inflation rate depended on three facts — or, rather, on three things that were presumed to be facts back in the mid-1990s:

  1. That the long run Phillips curve was vertical even with an inflation rate averaging 2% per year, so that there was no production or employment cost of such a target.
  2. That the safe real interest rate would be positive and significant, so that a 2% per year inflation target would not entail disturbingly low levels of nominal interest rates that might lead to instabilities in velocity.
  3. That shocks to the economy would be small, so that the Federal Reserve would never seek to compensate with an interest-rate reduction in the range of 5% or more.

We now know that all three of these were and are false.

The easiest way to fix this problem would be to revise the Federal Reserve Act — perhaps to add "healthy rate of nominal wage growth" to the list of Federal Reserve monetary policy objectives.

'The Real Cost of Coal'

Posted: 24 Mar 2015 09:00 AM PDT

David Hayes and James Stock:

The Real Cost of Coal, NY Times: Congress long ago established a basic principle governing the extraction of coal from public lands by private companies: American taxpayers should be paid fair value for it. They own the coal, after all.... Studies by the Government Accountability Office, the Interior Department's inspector general and nonprofit research groups have all concluded that taxpayers are being shortchanged.
This is no small matter. In 2013, approximately 40 percent of all domestic coal came from federal lands. ... Headwaters Economics estimates that various reforms to the royalty valuation system would have generated $900 million to $5.6 billion more overall between 2008 and 2012.
This failure by the government to collect fair value for taxpayer coal is made more troubling by the climate-change implications of burning this fossil fuel. ... The price for taxpayer-owned coal should reflect, in some measure, the added costs associated with the impacts of greenhouse gas emissions. ...
Industry is sure to oppose this, even though coal is the planet's most carbon-intensive energy source. Others will argue that an across-the-board carbon tax is a more efficient way to account for climate impacts. With no near-term prospects for such legislation, however, the Interior Department should set a royalty that provides fair value to taxpayers by addressing the climate costs of burning coal. ...

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