Relevant and even prescient commentary on news, politics and the economy.

Why Is The Fed Raising Interest Rates As Fast As It Is?

Why Is The Fed Raising Interest Rates As Fast As It Is?

I have a theory that at least some people at the Fed are supporting interest rate increases not because they are worried about incipient inflation that must be nipped in the bud in advance under a regime of inflation targeting, but because they are looking over the horizon and worrying about a possible recession in the not-too-distant future, and they want to be able to have interest rates high enough that they can then engage in lowering them as a stimulative policy tool under the circumstances.  If they are too low, then extraordinary measures will need to be used, and some of those measures may not be available in the future.

This theory is based on nothing solid at all, nothing.  I think that those who may be thinking this (and my likely candidate(s) would be people at the very top) are constrained in speaking openly due both to the current institutional arrangement of consensus decisionmaking within an established inflation targeting system with a 2% inflation target, not to mention pressure not to talk about possible future dangers.  The current line is that the economy is doing well, and certainly it is on the standard measures of unemployment and inflation, even if the former could be better and wages could be rising more rapidly.  Indeed, it is this good performance that is supposedly underlying the moves to raise interest rates and possibly “normalize” the balance sheet (which I doubt there will be too much action on).  But my theory is that for some of them it is a matter of trying to “normalize” on interest rates as well while the possibility of normalizing is possible, while the economy is doing fairly well and one can raise them without obviously slowing things down noticeably, so that indeed there will be the ability to lower them again in the future when necessary.

He did not put this theory forward, but it was reading the recent column by Larry Summers that appeared in the Washington Post on Monday was been linked to by Mark Thoma today (unable to make that link, sorry) and also can be gotten to at larrysummers.com/2017/08/14/why-the-federal-reserves-job-will-get-harder.  He is focused on the upcoming ending of the term of his rival as Chair of the Fed, Janet Yellen, and is worried about who Trump will pick and what will happen.  While stating that he would have “preferred a slower pace of interest rate adjustment,” he bottom lines that “Overall it has done well in recent years” (even though he did not get picked to be Chair).

Comments (4) | |

The Buchanan-MacLean Controversy

The Buchanan-MacLean Controversy

The book, Democracy in Chains (with an even more lurid subtitle) by Nancy MacLean, a respected (until now) historian at Duke University makes a strong argument that the late James M. Buchanan of UVa, VaTech, and George Mason was the crucial link between the ancient states right racism of John C. Calhoun and the current Trump administration. From Calhoun, incredibly inaccurately labeled a “libertarian,” through the Agrarian Populist literary movement that was popular at Vanderbilt where Jim wanted to go but did not (he went to Middle Tennessee State, a poor boy claiming to be a “socialist,”), Buchanan becomes supposedly an effective supporter of racial segregation in Virginia in the 1950s, and then becomes the inspiration for all of later Austrian libertarianism, having attended the opening meeting of the Mont Pelerin Society in 1947 (where they chose to be called “neoliberals”), and then after founding the Thomas Jefferson Center for Political Economy at the University of Virginia, and then running to  VA Tech in the early 70s, and then to George Mason in the early 80s, well, then he had a connection with the Koch Brothers, although this fell apart in the late  90s, but nevertheless he is the main link proving that Trump is a racist enemy of democracy.

This account has brought forth a massive counterattack from many current libertarians, much of it looking to me to be justified, involving many  serious factual errors.  I am not going to list them but note these sources for discussions of such matters: Munger, Horwitz, which includes other sources.  I shall try to deal with matters not covered by them, noting that I largely agree with their critiques.  The hard bottom line is that this may be a left version of  rightist climate change denial: those reading this book need to be aware of how deeply flawed and erroneous it is, although it makes some valid points.

So what is valid?  There is a very hard point that was not a main point in the book and has largely not been discussed, with most of the attention being on the deeply flawed account of Buchanan and G. Warren Nutter’s role in the matter of 1950s Virginia school desegregation (more on that  later). The hard point is Buchanan’s role in Chile.  MacLean is right that while there has been much been more publicity about the roles of Hayek and Friedman in Pinochet’s regime in Chile, Buchanan’s role there, nailed in by a crucial visit in 1980, may have been far more influential in forming the eventual  constitution, although this happened well after the original coup by Pinochet in 1973.  He played a key role in developing their constitution, which MacLean claims has anti-democratic elements that have in place defenses for the rights of capitalists that can only be overcome by two rounds of legislative votes. Yes, does put  a pro-capitalist tilt in there, but two  rounds of the legislature to overturn it?  In fact it was accepted by a referendum and has been amended numerous times since and reestablished a parliamentary democracy. Does not exactly look like Stalin or Hitler or Mao or  Kim Il Sung or something deserving the label “democracy in chains.”.  But it is not  pretty, given all the blood Pinochet spilled, and just like Hayek and Friedman, Buchanan has this  matter on his late conscience, and it is notable that he never published anything on this, and aside from a meeting in Palo Alto right after he did it, he never publicly bragged about it or acknowledged it, although apparently he did so at that  meeting.  But maybe he realized that it was the stain on his career that it is, and he was  in the end embarrassed about it and wished to cover it up.

The second matter is the most controversial, and indeed is the centerpiece of MacLean’s book.  This is the matter of his role with Nutter in 1959 in the school desegregation issue in Virginia, the one point regarding which an actual professional economist has come out for MacLean, namely Brad DeLong.  This is a much murkier matter, and after looking at it I see it as unclear with MacLean leaving out crucial  details, quite aside from ignoring crucial exculpatory evidence, even as she has some case.  This has to do with a report Buchanan and Nutter wrote to a specially appointed commission to deal with the school desegregation issue in 1959, in the context of Prince Edward County going for massive resistance against the 1954 Brown vs Board of Education SCOTUS ruling that led to the racial integration of public schools.  I think Buchanan should have signed the petition of VA academics supporting that ruling, but he did  not.  His proposal with Nutter suggested allowing vouchers for private schools along with  public schools, and MacLean and DeLong claim that this supported the effort to close down public schools in Prince  Edward County.  MacLean is right that at the time this did  effectively support that movement, although the Buchanan-Nutter proposal did not call for ending public education, and Buchanan has been in many places on record supporting the existence of public education, if with private school competition in the form of vouchers.

This  is  the central part of the book’s argument, and it is the most heatedly debated, and I do not  have the bottom line on it, although it looks to me that MacLean has overstated her argument. A crucial issue has to do with race, obviously.  MacLean herself accepts that there is zero  evidence that Buchanan was himself a racist and that all of  this was just part  of his  supposedly libertarian/Koch/Trump view of the world. As it is, I think that whatever was really going on in 1959, the bottom line on Buchanan’s views is given on p. 56 of her book where she grants that he supported “voluntary” and “local” desegregation based on local conditions, which she then effectively dismisses with a remark that he did not know what was going on in Arkansas and elsewhere, a comment that looks to me to be seriously stupid, to be very blunt.  Bottom line here is that Buchanan and Nutter may have effectively played a role in supporting the pro-segregationists in Virginia in 1959, but that was not their  position.

What about major problems with MacLean’s arguments?  I shall note three, starting with one noted by others and effectively granted by MacLean herself.  This is the claim she makes in the final chapter that Tyler Cowen supports suppressing democracy.  This is based on a quote she supplies that was definitely taken out of context, a context where it was clear that the content of the isolated quote was contradicted by what immediately followed it.  Even those who have supported MacLean’s book on Facebook such as Gary Mongiovi have agreed that MacLean was simply out to lunch on this matter, although while she has recognized that the quote is problematic, she has not fully retracted her argument related to it.  This is almost certainly tied to Cowen being director of the largely Koch-funded Mercatus Center at George Mason, with this being sort of the final piece de resistance of her book and argument, supposedly from racist anti-democratic John C. Calhoun to supposedly anti-democratic and implicitly racist Koch-funded libertarians at George Mason and Donald Trump.

A second problem reflects that MacLean is not an economist and seems to seriously misunderstand public choice theory, with her views on rent seeking being a strong example.  In discussing rent seeking, a concept originated by Buchanan’s important coauthor, the  late Gordon Tullock, and labeled by the centrist liberal development economist, Anne Krueger, she consistently identifies the supposed rent seekers as politicians seeking voting support from activist liberal groups such a unions and civil rights groups, especially the latter, whom the the supposedly anti-democratic tendencies of Buchanan are directed against.   But in fact in public choice theory the rent seekers are priviate interest groups that use government to create artificial monopolies, which generate the rents these groups are seeking.  It is really a quasi-Marxist view that sees capitalists using the government to enhance their  corrupt  profits.  It is ironic that I have seen public choice economists show up at URPE social gatherings at meetings to discuss how they have this in common with the radical left URPE folks, opposition to corrupt use of the government by rent seeking private interests.  I am not sure the URPE  people were all that open when I saw this, but there is no doubt that MacLean simply is completely wrong here and totally misrepresents public choice theory on this point, although the strongly pro-free market stance of both Buchanan and Tullock can easily mislead people on this.

Comments (3) | |

The Financial Crisis Tenth Anniversary

(Dan here…posted a day later)
The Financial Crisis Tenth Anniversary

Yesterday, August 9, is being widely proclaimed as the tenth anniversary of the beginning of the financial crisis that fully crashed in September, 2008, with the recession that began at the end of 2007 plunging more profoundly and widely after that.  The specific event on August 9, 2007 was the limiting of withdrawals from US mortgage backed hedge funds by the BNP Paribas bank in Paris.  In a post yesterday, one of the leading analysts and prophets of the crisis, Dean Baker, noted that BBC erroneously claimed that housing prices in the US began falling after that date, when in deed Dean accurately notes that it was the decline in housing prices starting somewhat earlier that led to this action by BNP Paribas ten years ago.

As one of those who analyzed what was going on better than most and with better timing, I link to my post of July 11, 2008, which analyzed what had been happening and forecast a full-out  crash coming soon, which indeed occurred a bit over two months later.  The title of that post is “Falling from the Period of Financial Distress into the Panic and Crash.”  I note that the unpublished paper I cited in that post by me with Mauro Gallegati and Antonio Palestrini, “The Period of Financial Distress in Speculative Markets: Interacting Heterogeneous Agents and Financial Constraints,” was finally published in Macroeconomic Dynamics in Feb. 2011, vol. 15, pp. 60-79.  A few comments now.

1)  Regarding the matter of the housing market bubble, everybody, including Dean Baker, always cites the numbers provided by the Case-Shiller index of housing prices in the 10 and 20 largest municipalities.  This is indeed an excellent source, but it is not the only one, and it is arguably biased because of its focus on large metropolitan areas.  A much broader index is that estimated by the Federal Housing Finance Agency.  Whereas the Case-Shiller index peaked around June, 2006, the FHA one peaked in January, 2007, over a half year later.  The FHA index is arguably more representative of the broader market, although it is probably true that the worst of the speculative markets and crashes were in larger metro areas, with declines in some of those already at down 10 to 12 percent by August, 2007, as Dean accurately notes in his post.  But even now I rarely see anybody citing the FHA index, with the occasional exception of Calculated Risk.

Comments (3) | |

Understating Trump’s “Achievements”

Understating Trump’s “Achievements”

I regularly hear and see on media and the internet that Trump “has accomplished nothing in six months” or variations on that, with some of these remarks focusing more on his legislative agenda, with discussions about whether it is “dead” or not here after only six months, which is either a very long time or a very short time.   I think this rhetoric is both unwise and inaccurate. It is unwise because it suggests that we want his agenda to be passed, to the extent we know what it is (specifics for large parts of it are missing). Such talk simply encourages the Trujmpisti to push harder to pass all their awful plans.  Thus we should be glad that Obamacare is still in place and not encourage the bums to continue to try to replace it with one of  their half-baked plans that will throw lots of people off their  health  insurance.

As for inaccuracy, while it is true that a lot of big ticket items on the legislative agenda remain stalled, notably in the areas of health care, tax “reform,” financial sector “reform,” and infrastructure, in fact Trump has done much damage with his executive actions, mostly involving undoing Obama regulatory actions, quite aside from getting Neil Gorsuch on the SCOTUS, which is very important and has already led the SCOTUS to partially support his awful Muslim ban.  In any case, while withdrawing from the Paris climate accord is mostly symbolic, he and his underlings have made many moves in the environmental area, none of them good, making it easier for companies to pollute and redirecting research towards fossil fuels and much more. His moves in the immigration area have been awful, although Obama did a lot more deporting than we remember. Nevertheless, although supposedly he was going to focus on deporting criminals, the focus of Obama, he is deporting any illegal immigrant he can get his hands on, and the implementer of his draconian immigration policy is now his chief of  staff.  Prison reform is out the window for now, even though this was an area where liberals and conservatives have agreed in recent years something should be done.  His cutting back on public parks and monuments and the crazy stuff coming out of his education dept, well,the list goes on.

Comments (4) | |

Extreme Contempt

Extreme Contempt

Donald Trump has engaged in so many outrageous statements and conduct that it has become very difficult to remember which of  those were really the most outrageous, the most morally contemptible, the ones that should have led his supporters to have abandoned but they did not, the ones that merited above all others the most Extreme Contempt.

The events of the last 24 hours have clarified for me what was the moment in 2016 when Trump crossed the line, when he committed an act of Extreme Contempt that should have lad to every Republican worth anything above a sewer of morally contemptible and disgusting garbage to have rejected this worst of all people to have occupied the White House.  That moment was when he dissed John McCain as a loser for having been captured by the North Vietnamese during the Vietnam War.  I think the only way fervent Trump supporters can justify their existence on this planet after that particular outburst is to simply ignore it and forget about it, which is what I am sure the vast majority of them have done,  But the events of the last 24 hours have brought this matter back into focus, and while I really do not know, I think that it is quite likely that when we get to the bottom line, and we are indeed now at a very serious bottom line, Donald Trump’s ultimate desecration of any moral  consciousness when he dissed McCain for becoming a deeply tortured POW has come back to haunt him and defeat his pathetic and incoherent effort to overturn the Obama health care legacy.

Let me be clear that I have many disagreements with McCain, and many things he has done personally.  But the man’s days are now shorter than most of ours.  Yeah, maybe it will all go away and he will still be a Senator a decade from now.  But more likely he will follow the late Ted Kennedy, who apparently had the same sort of “aggressive” brain cancer he has, and, well…

So, let me confess that I know John McCain.  About a decade ago I sat next to him on a long airplane flight and we discussed climate change.  He had a reasonable view in my mind, and indeed when he ran against Obama, his position was only marginally less progressive/reasonable than Obama’s.  I actually gave him my card offering to give advice, although I never heard from him later.  Of course he has gone silent on this issue more recently as his party has gone off the deep end on denying the very existence of global warming, on the  list of many others where, well, tsk tsk.

So, let us get to the really serious. McCain has been going back and forth on the heath care issue, a man about to die and having surgery on taxpayers money, a man who is by far the most serious Republican senator there is currently by several orders of magnitude, and not just because he is a former presidential candidate of the Republican Party in 2008.  No, he is serious beyond all of them for  his experience, much bragged about by his party in 2008, as a POW in Vietnam, where he experienced Extreme Torture, leading him to stand unequivocally and without a shred of doubt that torture is completely unacceptable, morally and practically.  I applaud his declaring and maintaining this position throughout the Bush admin when torture got approved during the Iraq War.  On this matter he has absolute and unassailable credibility beyond all critics, and I applaud him for this.  I shall add that this is a matter that is personal. My wife was tortured by the former Soviet government, and I have also been tortured in a distant land I shall not name and of which I shall not speak. Unsurprisingly, my wife and I have deep personal support for McCain’s unequivocal position on this matter to totally oppose torture in all circumstances everywhere period.

Comments (6) | |

Could The US Default Due To A Complexity Catastrophe?

Could The US Default Due To A Complexity Catastrophe?

Definitely.

Front  page story in today’s Washington Post by Damien Paletta reports that “Treasury chief hurtles toward fiasco,” the fiasco being a failure to raise the US debt ceiling in time to avoid a default.  Trump has declared that Sec Mnuchin is responsible for this matter, which he should be, but somehow has not made a sufficiently definitive statement to keep his former Freedom Caucus big cheese OMB director, Mulvaney, from opining that Mnuchin is an out of it New York finance guy (Goldman Sachs even) who is not well connected in Washington, and he, Mulvaney, thinks that the dumb games he played as a Congressman threatening to default are appropriate for  somebody in charge of all this.

The deadline is approaching, although it might be somewhere between early September and mid-October, but at some point if the debt ceiling is not raised, the US will seriously default, something we have not seen, and I doubt that any deal Mulvaney might propose would get through this dysfunctional Congress.  And the article reports that while Mnuchin wants a “clean raise” before  the Congress really shuts down in August, well, according to WaPo, he does not have the “stature in Washington to press through a vote on a measure” supported by all previous Treasury Secretaries.  Indeed, the article is right that he may not be able to do so, and the US may well seriously default on its debt for the first time, something the gang that Mulvaney has belonged to has declared is no big deal. We may be about to find out if that is correct or not.

In thinking about this I have come to realize that part of the problem is that this is a very complicated issue, one that few people understand, and that this lack of understanding is self-propagating: that few understand it means that there are few who can teach those who do not understand it what it is about. The upshot is that an incredibly miniscule proportion of the US population has any remote idea what all this  is about, so are not  putting any pressure on these loud mouthed Congresspeople to behave resonably. If in fact there is a default and it leads to a global financial crisis that puts the world economy back into a serious recession, well, who could have known that, and who will be to blame?

Comments (19) | |

Another Personal Observation On Privatized Highways

Another Personal Observation On Privatized Highways

Last month I posted a personal observation on Trump’s plan to privatize infrastructure, noting especially how in the long run privately owned turnpikes in Virginia ended up in government ownership.  In the comments on that post there was discussion of the Indiana Toll Road, privatized a few years ago.  I have just ridden on it (yesterday), and I shall recount as an anecdote datum my less than pleasant experience, bad enough to make me want to avoid it entirely in the future.

I was driving west on it from Ohio.  I stopped in one of the new service areas to get some pizza.  Fancy roof, but only two eating places, Lagrange in the east.  OK, but nothing great.  I would say road condition about same as Ohio’s, but tolls higher, although not as high as in Illinois or Pennsylvania.  Anyway, I saw that I had enough gas to make it to the LaPorte service area in the western part of the state, so did not refill there or at the Elkhart one.  Nowhere did I see any signs or information about any problems with any of the upcoming service areas.

Comments (7) | |

Robert Samuelson At The Washington Post Is Bashing Social Security Yet Again

Robert Samuelson At The Washington Post Is Bashing Social Security Yet Again

Yet again.

I grant that he did not do  it at length or present a lot of clearly incorrect nonsense.  But bash Social Security he did, using an old ruse to do so, combining it with Medicare to invoke a long term deficit danger due to the two of them together, when in fact it is well known that it is the Medicare part of that projection of future spending that leads to all the scary looking deficit numbers, not the Social Security part.

Most of the column by Robert J. Samuelson today,”Everybody’s mad at somebody,” is a lament about political polarization in the US today, and the obnoxious effect this has policy making.  Fred Hiatt has a similar column, “Trump’s wasted opportunity,” although I would say that for once Hiatt avoided saying anything too silly, noting possible political compromises on a carbon tax, immigration policy, and tax reform, that might have been possible if Trump had been willing to be a nonpartisan leader, but that look unlikely to happen given his descent into cheap partisanship, as well as his general ignorance and incompetence.  Most of Samualson’s column deals with past history of compromises made and how we got to not doing that anymore. However, his misguided statement on Social Security appears in a single paragraph, which I shall quote in its entirety now, regarding supposed compromises or issues that need compromising that are not likely to be.

“To take two familiar examples: The Republican promise to repeal and replace Obamacare while also  reducing premiums and expanding coverage was never possible.  It was make-believe. Similarly, the Democratic refusal to deal with the escalating costs of Medicare and Social Security is crushing other worthy government programs – a strange position for a pro-government party.”

So here is RJS back to  playing the role of WaPo Very Wise Person, or whatever, calling for  a compromise between the supposedly equally unwise positions of  the two parties.  But, the hard fact is that his analysis of the impossibility of the GOP position is completely accurate.  He falls down when he gets to the Dem side.  Again, there is a rising trend of medical care costs, which affects Medicaid as well as Medicare. If he had replaced Social Security with Medicaid, he would have been much more accurate, and clearly we need some sort of program to get rising medical care costs under control

But throwing in Social Security there instead of Medicaid (which the GOP is trying to cut without cost controls, just throw people off) as part of their Obamacare repeal and replace, muddies the waters, although it fits in with the longstanding campaign by the WaPo ed board to slash Social Security. And it does have RJS back on his regular Monday spot playing that old game, even if  he did not make too much of a silly fuss about it this time.  But some of us have our eyes on him, and will call him out when he pulls this nonsense, when we catch him. And he was at it again here.

BTW, Happy Fourth of July, you all.

Barkley Rosser

Comments (7) | |

Comments on Profit and Capital

Comments on Profit and Capital

Yeah, I know, Marx wrote three volumes on this, and in 2014 Piketty published in English a more than 700 page book on it that ended up on the bestseller list, although neither of these resolved the long-running debates about the nature of profit or of capital, which continue to swirl.  We have seen recently someone claiming that distinguishing between retained and distributed earnings is the key to understanding profit, and failing to do so means all of economics as we know it is wrong. But then there have been many other views that this view does not remotely address.  Regarding capital itself, which profit is usually thought of as being one of the sources of income related to, let me quote the following that notes a range of views out there.

“What really is capital and what does it mean for value, growth, and distribution?  Is it a pile of produced means of production?  Is it dated labor?  Is it waiting?  Is it roundaboutness?  Is it an accumulated pile of finance?  Is it a social relation?  Is it an independent source of value?  The answers to these questions are probably matters of belief.”    From Catastrophe to Chaos: A General Theory of Economic Discontinuities, Kluwer, 1991, p. 125.

I leave it the imagination (or googling) of the reader as to who the author of that book is, although I note that the quotation appeared in the second edition of the book that came out in 2000.

So there are surface issues regarding the nature of profit and capital, and there are deeper issues.  This quotation lists some of the deeper arguments that have been made by different schools of economics. The “pile of produced means of production” is basically a Principles textbook orthodox position, which rules out financial definitions, with many “people in the street ” thinking it is an “accumulated pile of finance,” a later answer in the list.  People teaching intro econ courses like to pound on wrongness of this popular view, ultimately falling back on the argument that capital is a “factor of production,” which means that whatever it is one must be able to use it in actual production processes.” Machinery and buildings and other such “produced means of production” do that, so they count, and the building of them is what “real investment” is, not just somebody using some money to buy some financial assets, which is what the person in the street usually means by “investing my capital.”  We spend lots of time disabusing them of their delusions, we who know that “money is an illusion,” and that while finance is very important in the functioning of modern economies, piles of money or financial assets do not in and of themselves actually produce something.  Rather they are indicators and means for determining who gets to own those actually productive forms of “real capital,” oh to throw out another term.

Comments (20) | |

Muhammed Bin Nayef Bin Abdulaziz Al Sa’ud Confined To His Palace

Muhammed Bin Nayef Bin Abdulaziz Al Sa’ud Confined To His Palace

In Jidda, according to the New York Times today.  So the story about the now deposed 57-year old former Crown Prince of Saudi Arabia and former Minister of the Interior, Muhammed bin Nayef (MbN), putting out a video supporting his own removal appears to be phony propaganda.  The Saudis instead have been broadcasting a video of the new Crown Prince, 31-year old Muhammed bin Salman (MbS) kissing the hand of (MbN).  Presumably he did that back in the day when MbN was the Crown Prince and MbS was his supposed loyal deputy. We have no video of MbN kissing the hand of MbS.

As it is, the story also reports that when MbS’s elevation was announced, MbN returned to his palace to find his guards replaced by ones loyal to his successor.  He and his daughters have since been confined to the palace and also forbidden to leave the country, although the latter would seem to be impossible if they cannot leave the palace.

MbN has been replaced as Minister of the Interior by his nephew, Muhammed bin Saud bin Nayef, whose father is governor of the Eastern Province.  Reportedly US intelligence officials are “outraged” at this, having worked long and well with MbN, who was reportedly the key figure behind squashing al Qaeda in Saudi Arabia,  He is viewed by these people as very competent, and his successor has apparently no experience at all in the area.  Wonderful.  But these people are constrained from speaking openly because of the clear support by President Trump and his son-in-law, Jared Kushner, of the elevation of MbS, as well as his aggressive warmongering in Yemen, against Qatar, and also against Iran

Comments (13) | |