Friday, August 1, 2014

Bad timing

I don't mean to use this as a follow-up to my last three posts. I think Steve Roth is right: something interesting is going on with Market Monetarists lately.

Just think of this post as a reminder of how empty economics can be.

Jazzbumpa writes:
Market monetarists like Beckworth and Sumner are smart guys, but their reasoning is flawed. They define monetary policy not in terms of either money or policy, but as GDP growth, which is a resultant. This is either circular reasoning or assuming the conclusion.

That reminded me of something Daniel Kuehn said:
...for market monetarists like Scott Sumner, who seem interested in going beyond decision rules and actually offering an analytic claim, there seems to be no way to logically make the statement "we have done the market monetarist policy rule and the goal was not achieved". Why? Because if NGDP level targets have not been reached then by definition you haven't been doing market monetarist policy.

Fair criticism, I think.

Thursday, July 31, 2014

"How much money should the central bank print and buy things with?

As much as is necessary, to hit the NGDP target." -- Nick Rowe

Total Assets of the Federal Reserve, almost Five Times what they were before the Crisis. So far.

Wednesday, July 30, 2014

4.9 times as big as it was in August, 2008

Tuesday, July 29, 2014

Track the problem to its source

Central banks don't buy liabilities.

Steve Roth says

A a year or so back I highlighted David Beckworth’s great post on Helicopter Drops... I’ve been pinging ever since to see a response to that post from Market Monetarist opinion-leader Scott Sumner... I won’t rehash it all here but rather point you to Nick Rowe’s wonderfully successful effort to bring it all to conclusion, synthesizing Market Monetarist and New Keynesian thinking into support for a policy proposal that I think Post-Keynesians and MMTers would also jump on with gusto...

And that was pretty much it. I had to follow Steve's links to discover the topic. Started with Beckworth on helicopter drops:

Fiscal policy geared toward large government spending programs is likely to be rife with corruption, inefficient government planning, future distortionary taxes, and a ratcheting up of government intervention in the economy. So I will pass on this type of fiscal policy. Fiscal policy, however, that largely avoids these problems and directly addresses the real issue behind the aggregated demand shortfall--an excess demand for safe, money-like assets--I will endorse. And that form of fiscal policy is a helicopter drop, a government program that gives money directly to households.

Oh, says I. Giving money directly to households. Yeah, that reduces the debt-per-dollar ratio. That works. I like it.

I don't like Beckworth's reasoning -- that "the real issue behind the aggregated demand shortfall [is] an excess demand for safe, money-like assets". No. The problem did not begin with the sudden increase in demand for safe, money-like assets. The problem began when normal assets started getting "toxic". Or rather, the crisis began with toxic assets. The problem goes much farther back in time.

I went back to Steve Roth's and followed the link to "Nick Rowe’s wonderfully successful effort". Nick's post -- Oh! I read that one already. Read and commented on it I think... Yup. That's probably not good, if there is all this backstory that Steve and others have been following for "a year or so"...

Oh, well.

At WCI, Nick makes me shudder:

How much money should the central bank print and buy things with? As much as is necessary, to hit the NGDP target. And if it runs out of other things to buy, like government bonds, or commercial bonds, or......, then it should buy newly-produced things, if necessary. And if that means it is buying too much, and getting too big, then raise the NGDP target and the implied inflation rate and the implied tax on holding currency.

... If the central bank runs out of things to buy and needs to buy new bridges to hit its NGDP target, and if the government doesn't want the central bank owning bridges, the government should buy those bridges financed by issuing bonds, and let the central bank buy those bonds.

The central bank should just keep buying things, Nick says, until the path of NGDP is where we want it. Even if it has to buy bridges.

That's what I was responding to, in my comment:

No. If you have to say the central bank should buy "newly-produced things, if necessary" then I have to say you misunderstand the problem.

In the normal economy Nick would never say such a thing. Even two years ago, probably, Nick would not have said such a thing. But the central bank has been unable to solve the problem, so the human reaction function keeps turning up the pressure.

It is as if Nick knows the central bank should be able to solve the problem -- and that if it fails, the failure must be because the central bank wasn't trying hard enough. But this evaluation of central bank policy is based on the assumption that bank policy has been right all along, and we only need more of the same. I don't think that's the case.

When the central bank sells something, it takes money out of the economy and puts something else in. When it buys something, it puts money into the economy and takes something else out. When the Federal Reserve was buying up toxic assets, it was putting "safe, money-like assets" into the economy and taking the toxic assets out.

But if toxic assets seem to be the problem, then really the problem is whatever it was that made the assets toxic. You have to track the problem to its origin. You don't wait till the shit hits the fan and then say it's the stinky mess that's the problem.

Toxic assets? That was a result. You have to ask: What made the assets toxic? The assets became toxic because the liabilities became unaffordable.

When people could no longer afford to make the mortgage payments, mortgage-backed securities became toxic.

The problem is not that assets went bad. The problem is what made them go bad. Track the problem to its source. Liabilities became unsustainable; therefore, assets became toxic. Central banks bought up toxic assets, but left liabilities to fester.

The Federal Reserve's balance sheet is now almost five times its pre-crisis size, but still the problem is not solved. Nick says let them just keep buying assets until the problem is solved. But it did not work, and it will not work, and here is the reason: The problem is not in the assets. The problem is in the liabilities.

Central banks don't buy liabilities. So central bank policy has not solved the problem, and cannot solve the problem. The liabilities are still there. No matter how many assets the central bank buys, the liabilities remain.

That's why I like the "helicopter drop". It puts money into the economy. Some of that money goes directly into the hands of people who might use it to pay down their debt. That decreases liabilities and hopefully it decreases toxic liabilities. Pot luck, yes, but it's better than buying bridges.

Monday, July 28, 2014


I recall some offhand remark by Milton Friedman in either Free to Choose or Money Mischief, or possible both, about the "Oz" in "the Wizard of Oz" being a reference to an "ounce" of gold...

... Here it is, a footnote to Chapter 3 of Friedman's Money Mischief:
In a fascinating paper, Hugh Rockoff (1990) persuasively argues that Frank Baum's The Wonderful Wizard of Oz "is not only a child's tale but also a sophisticated commentary on the political and economic debates of the Populist era" (p. 739), that is, on the silver agitation generated by the so-called crime of 1873. "The land of Oz," according to Rockoff, "is the East [in which] the gold standard reigns supreme and where an ounce (Oz) of gold has almost mystical significance" (p. 745). Rockoff goes on to identify the Wicked Witch of the East with Grover Cleveland, the gold Democrat who, as President, "led the [successful] repeal of the Sherman Silver Purchase Act of 1893" (p. 746).

Similarly, Rockoff is able to identify many of the other places and characters, and much of the action, with places, people, and events that played a significant role in the final years of the free-silver movement.

I read that, probably some time during Bill Clinton's first term. But I never saw another reference to the topic till now. Having found some useful-looking stuff on regression in Excel, in relation to the Marginal Propensity to Consume, I followed a few links to Professor Combs of Fordham, and to notes on a course called The Wealth of Words: Economics and Literature:
ECRM 1160: The Wealth of Words:  Economics and Literature

Course Description:

From the writings of Austen to Zola, literature has a great deal to teach us about economic principles.  Some are obvious, such as the theme of social and economic inequality in Steinbeck’s The Grapes of Wrath; others are more veiled, such as the allegory of the Federal Reserve System and debates over monetary policy in The Wizard of Oz.  These are only two of many examples where economics and literature intersect.

This course will introduce economic ways of thinking to students interested in the study of literature while opening the literary world to students interested in economics and business.  The course content uses selections of poetry, short stories, songs, plays, literary essays, films, and chapters of novels to demonstrate core economic principles and concepts.  Some examples of topics and titles include the ideology of capitalism (Forster’s Howard’s End); the anti-capitalist sentiment (Lewis’ Babbitt); the non-market economy (Erdrich’s “Francine’s Room”); poverty and income inequality (Wright’s Native Son); monetary policy (Baum’s The Wizard of Oz); urban industrial development (Sandburg’s “Chicago”); opportunity cost (Yeats’ “The Choice”), and social and economic (in)justice (Brooks’ “The Lovers of the Poor”).  The fourth hour will be used to view films, workshop student essays, and visit relevant New York City sites of interest, such as the Lower East Side Tenement Museum, Ellis Island, and the Federal Reserve Bank of New York.

So there ya go.

Sunday, July 27, 2014

Roots of the Gold Standard

The Schoolmen: "Certain theologians of the Middle Ages; so called because they lectured in the cloisters or cathedral schools founded by Charlemagne and his immediate successors."
St. Thomas: 1225 – 1274
Buridan: (c. 1300 – after 1358)

Excerpts from Monetary Theory before Adam Smith, by Arthur Eli Monroe, Ph.D., Assistant Professor of Economics, Harvard University. (The book is (c) 1923 by Harvard University Press)
St. Thomas not only repeated what the Greek philosopher [Aristotle] had said about making money of materials useful in themselves, but added that the high specific value of the precious metals, making them easily portable, was a further reason for their use as money.

To this somewhat tentative analysis Buridan made important additions. Money should be made of precious material, he says, in order to facilitate transportation; durable, in order to serve as a store of value; divisible into small parts for lesser purchases; and capable of being impressed with adequate marks for identification.

...the statement of Buridan may be said to have remained the accepted one for over a century, and the basis of all later discussion.

Saturday, July 26, 2014

The whole of Chapter One

Here it is, the whole chapter, sans footnote, from the Marxists:
I HAVE called this book the General Theory of Employment, Interest and Money, placing the emphasis on the prefix general. The object of such a title is to contrast the character of my arguments and conclusions with those of the classical theory of the subject, upon which I was brought up and which dominates the economic thought, both practical and theoretical, of the governing and academic classes of this generation, as it has for a hundred years past. I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium. Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience.

Short and to the point. And it comes first. It's the first chapter in the book. I think that means something. I think that means Keynes thought it important.

Not insignificant because the chapter is short, but clear because the chapter is short, and important because it comes first. What was it Cochrane said?

A good joke or a mystery novel has a long windup to the final punchline. Don’t write papers like that — put the punchline right up front and then slowly explain the joke.

That's what Keynes did: He put the most important thing first.

When I came upon Chapter One just now, what struck me was its brevity. But what I remembered then was the long back-and-forth between Peter L and Philip Pilkington at Pilkington:About. I am thinking in particular of this from Peter L:
We’re discussing what is an extremely minor point (and I am squarely to blame here!). But here’s one last go at clarification:

1. I noticed you say that the reason why the GT is called “general” is because Keynes saw it as applying to all economies regardless of institutional framework and political system.

On this I think there is no room for misunderstanding we agree that you said this and we agree on what you meant by it. We also agree Keynes was attempting a theory of economic behaviour so of course, mutatis mutandis, if that theory is correct in one set of institutional circumstances, it would fit all.

2. Ok next you cite the German preface of GT in support of your contention in 1 above.

3. My argument is that while Keynes may well have seen his theory as being applicable not only to economies with democratic institutions, that was most definitely not his REASON for using the term “general”.

Unless I’ve missed something (altogether possible of course!) I see no scope for misunderstanding.

While I would contend the German preface is not a place to find Keynes’ theory, I do think what he says on page three is definitive, and I’m sure you know this passage well. (My added emphases).

“I have called this book the General Theory of Employment, Interest and Money, placing the emphasis on the prefix GENERAL. The object of such a title is to CONTRAST the character of my arguments and conclusions with those of the CLASSICAL theory of the subject, upon which I was brought up and which dominates the economic thought, both practical and theoretical, of the governing and academic classes of this generation, as it has for a hundred years past. I shall argue that the postulates of the classical theory are applicable to a SPECIAL case only and NOT to the GENERAL case, the situation which IT ASSUMES being a limiting point of the possible positions of equilibrium. Moreover, the characteristics of the SPECIAL case assumed by the classical theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience.”

Finally it is surely the case that Keynes really did not think of Marshall et al were simply writing about the Victorian British economy whilst the “general” theory would apply to the Victorian British economy as well as the German totalitarian economy and indeed any others.

His point is that the classical theory applies to NO economy (except in SPECIAL circumstances).

Yes, I made you read the whole of Chapter One twice now. Forgive me. But it's an important paragraph. It's important not to misunderstand it. I think Peter L has it exactly right, emphases and all.

Maynard was telling us that the economy is much bigger than we think, bigger and more of a whole. Economists today argue whether something somebody said a hundred or a hundred and fifty years ago is right or wrong. All else aside, isn't that pathetic? Everybody is wrong sometimes, but most people try to get it right. Any economist who is worth anything tries to get it right. So, taking the best of what someone offers, that part of what they say is probably correct, or close.

So why is it we take these things people said back when, when the economy was different than it is now, why is it we take these things and just call them wrong and reject them? Are we not being most disrespectful? Are we not missing the bigger picture? Are we not dismissing something brief, clear, and important enough to make it into the first chapter of The General Theory?

In Thoughts on Brad’s Thoughts on Economic Theology, Robert Waldmann quotes Joseph Stiglitz (via Brad DeLong):

a peculiar doctrine came to be accepted, the so-called “neoclassical synthesis.” It argued that once markets were restored to full employment, neoclassical principles would apply. The economy would be efficient. We should be clear: this was not a theorem but a religious belief. The idea was always suspect…

Waldmann adds: "Brad notes that the peculiar doctrine is due to Keynes".

DeLong offers a different quote, but that "particular doctrine" is the one Keynes established in the first chapter, which by now you've read at least twice. Stiglitz rejects it. DeLong says "it is not true in practice". And Waldmann rejects it also, saying "I don’t think that, even given full employment, markets are efficient."

I say markets were efficient at the time economists observed efficient markets -- the time of Say and Ricardo and Smith. Today, no -- but that's a different matter.

Here's the thing: Stiglitz and Delong and Waldmann flat-out reject the notion that markets can be efficient even when the "special case" holds true. I think the "special case" is a unique time, a peak in the Cycle of Civilization.

Now really: which view is more interesting?

Friday, July 25, 2014

But it's Yglesias...

Big chains pay better than mom and pop stores, says the title of the post. But it's a story by Matthew Yglesias, so I already have my doubts. He writes:

High school graduates who work for companies with over 1,000 employees earn 15 percent more than similarly educated workers who are employed by smaller firms. Workers with at least a little college education see a bigger pay boost and earn 25 percent more when employed by big companies.

Similarly, for retail establishments:

The researchers find that not only do big companies pay higher wages, but big stores pay higher wages. High school graduates working at retail establishments with over 500 workers earn 26 percent more than similarly educated workers at smaller shops. Those with at least some college education, again, earn an even larger premium — 36 percent more at big stores than small ones.

I wonder how those numbers would look if "business size" was based on volume of sales rather than number of employees. How would it look if we compared worker pay to gross business income?

I want to see ratios of dollar-values-to-dollar-values, rather than dollar-values-to-head-counts. I don't think the bigger, the better would hold up so well if you did the dollars-to-dollars comparison.

Thursday, July 24, 2014

Denominator Problems

At Economist's View, from James Choi: 'One of the Most Vivid Arithmetic Failings Displayed by Americans'