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The Rabid two Minute Chait

Jon Chait has a great time with Paul Ryan and someone named McCay Coppins who asserted (without feeling any need to present evidence) that Chait is a “rabid” critique of Paul Ryan. Do click the link and read the whole post. You won’t regret it.

(Don’t you hate the way the internet makes it possible for us to read only things which confirm our prejudices ? No I don’t either. That is why I have such an unhealthy addiction to the internet).

Some excerpts

Coppins presents criticism of Ryan as “rabid,”a “caricature,” and “personal,” and Ryan himself as wounded, misunderstood innocent:

When I mention one of his most rabid critics in the commentariat, the liberal New York magazine writer Jonathan Chait,

then Chait rabidly reads a budget resolution (if you ever see a dog reading a budget resolution, turn around and walk away).

The underlying problem here is a massive gulf between Ryan’s rhetoric and his policy agenda. Ryan’s famous budget consists primarily of extremely deep cuts to programs benefiting low-income Americans.


How to resolve this tension? One way is to assert that the best way to help poor people is to cut their subsidies. Ryan does indeed make this case, and Coppins endorses it:

If [Ryan’s] rhetoric lacks poetry, his arguments against the current state-centric approach to aiding the poor is compelling. Since Lyndon B. Johnson declared a “war on poverty,” the U.S. government has spent an estimated $13 trillion on federal programs that have resulted, 50 years later, in the highest deep poverty rate on record.

This statistic is one of the very few fact-based policy assertions in Coppins’s story. It is wildly misleading. Ryan is using a measure of poverty that excludes a lot of the subsidies government gives to the poor.


Ryan also wants to escape responsibility for the draconian consequences of his proposals. “I can’t speak for everybody and put my stuff in their budget,” he tells Coppins. “My work on poverty is a separate thing.” Their budget? The great vision statement for which Ryan has been widely hailed is now somebody else’s?


There’s not much else to argue with in Coppins’s account, which relies on visual description to press his case for Ryan’s good faith.

my comment:

As a result of your lashing out with this rabid personal caricature, I have decided to never again pay any attention to anything this McKay Coppins person writes or says. As you foam at the mouth and fear water, don’t feel too proud. I am only vaguely aware of who McKay Coppins might be, and never paid him or her any attention (google images just convinced me that he is a man and, yes, I honestly didn’t know).

My usual bit about deep poverty after the jump.

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Scott Brown Comes Out for a New Hampshire State Healthcare-Insurance Public Option. In the Name of Freedom. Cool!**

[Annotation added below.]

I’ve written here on AB, extensively now, about the invidious co-opting of the word “freedom” by the political far-right.  I’ve addressed this mainly in the context of the conservative Supreme Court justices’ neat trick of disconnecting the word from any relation to actual physical freedom as long as it is a state court (in criminal cases and in a variety of civil cases, e,g. adult-guardianship and conservatorship cases, as well) or a state or county prosecutor’s office rather than the federal government that violates federal constitutional rights in order to remove physical freedom.  This is done in the name of federalism as allegedly envisioned by James Madison.

And on Saturday, I addressed it in the context of the Cliven Bundy matter, which includes the support he’s received from the likes of Nevada Senator Dean Heller.  The immediate occasion for that post was to note that this bizarre appropriation of the word “freedom” to justify doing whatever the invoker of “freedom” wants to do–which, for the Supreme Court’s invokers, includes obsessively requiring that state courts, but not state legislatures, be entitled as “sovereigns” to violate individuals’ federal constitutional rights; I really can’t stress this enough–is finally, thanks to Bundy, being recognized by actual professional pundits. Specifically, by New York Times columnist Gail Collins in her Saturday column.  Paul Krugman used his bi-weekly Times column this morning to highlight it.

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Is the Fisher Effect Stable or Unstable?

Low inflation in an atmosphere of low nominal interest rates brings up the issue of the Fisher Effect. Here is the long run Fisher equation for a “steady-state” nominal interest rate…

Inflation rate = steady-state nominal interest rate – natural real interest rate

The steady-state means that the nominal interest rate is projected to stay within a narrow range into the future. The natural real interest rate is the natural growth rate of an economy considering such factors as productivity, labor force growth and capital accumulation. The natural real rate is considered independent of monetary policy in the long run.

So how does inflation respond to the steady-state? Does it put up the white flag and surrender to the Fisher Effect or rebel against it?

Dynamic Equation for the Fisher Effect

If the Federal Reserve was to all of a sudden set the Fed rate at a steady-state rate and say that they would hold it there for a long time, inflation and the natural real rate would adjust over time according to the Fisher equation. This adjustment over time is described by a dynamic equation.

A dynamic equation shows changes to variables over time. Many dynamic equations lead asymptotically to a stable steady-state, and some lead to an unstable state. Here is the dynamic equation that I will use to look at the Fisher Effect.

dynamic 1

 πt = Inflation rate at time period t.

π0 = Beginning inflation rate

π* = Steady-state inflation rate if Fisher Effect is stable

α = autoregressive coefficient, which ultimately shows if the dynamic equation is stable or unstable. In the equation, it is raised to the time period t. When the autoregressive coefficient is between -1 and 1, the equation leads to a stable steady state. When α is greater than 1 or less the -1, the equation does not lead to a stable steady-state and is unstable.

The equation tracks changes in time by raising the autoregressive coefficient to t, the time periods. The equation comes from an ADL model (Autoregressive Distributed Lag). This particular equation assumes that the explanatory variable, in this case the nominal interest rate, stays constant at its long run mean. Since the Federal Reserve is projecting the Fed rate within a low narrow range for a couple years, I assume the Fed rate to be at a “long run steady-state” mean.

α, the Autoregressive coefficient determines the path of the inflation rate

The critical variable to test in the above equation is α, the autoregressive coefficient. This coefficient describes the inflation potential in the economy. For example, α will increase when there are factors to support inflation such as rising labor share, rising investment demand, rising consumption, strong fiscal spending, strong currency, low perceived unemployment, destroyed capital and strong labor bargaining power. However, these factors can go against inflation too, which will lower α, the autoregressive coefficient.

Stable Fisher Effect

When α is between -1.0 and 1.0, the dynamic equation is stable and leads to a steady-state. The Fisher Effect depends upon a stable dynamic equation in order for inflation to trend to its Fisher equilibrium rate.

dynamic 3

In this graph, the autoregressive coefficient is 0.94 (less than 1.0). Consequently, we can see that through time, inflation (orange line) is trending toward the Fisher equilibrium inflation rate of 0.5% (blue line). In this case, the Fisher Effect is stable.

Unstable Fisher Effect

When α is greater than 1 we have an inflation rate that explodes upward or downward over time disrespecting the Fisher Effect. (Note: If inflation starts below π*, then inflation will fall instead of rise according to the equation.) Inflation in this case responds to other factors that override the Fisher Effect. In the following graph, the estimated α, autoregressive coefficient, is 1.05.

dynamic 2

We can see how inflation keeps rising in spite of the Fisher Effect. In this case, the Fisher Effect is unstable.

One could imagine that the autoregressive coefficient was very high during the Weimar Republic in Germany just after World War I. Even though the nominal interest stayed steady between 3% and 5%, inflation sky-rocketed. There were strong inflationary pressures that overcame the Fisher Effect, such as rebuilding the country to printing money to pay off foreign debt.

So, Is the Current Fisher Effect Stable or Unstable?

Drum roll please… This is the finale.

Now that we have our model, how does current data match up to it? Inflation data (CPI less food & energy) is added to the model for 1st quarter 2012 until 1st quarter 2014.

dynamic 4

Inflation is trending fairly well along the path of a stable Fisher Effect. This is evidence that the Fisher Effect is working. Inflation is trending lower so as to raise the real rate (currently -1.2%) to its natural rate of 1.5%. But where exactly will the lower inflation rate become stable? Let’s now raise the Fed rate to a projected 3.0% from the 2.0% in the model. The equilibrium inflation rate that satisfies the Fisher Effect will now rise from 0.5% to 1.5% (light blue line rises). The autoregressive coefficient is changed to 0.80 to match the inflation data with a dynamic path.

dynamic 5

Even in this case, inflation is following the path of a stable Fisher Effect, but it is not clear how low inflation is trending. Is it trending to 1.5% or lower? The answer depends on the projected steady-state of the Fed rate and changes in inflationary forces.


The Fisher Effect wants inflation to align itself with a steady nominal Fed rate and the natural real rate of interest. Eventually the Fed rate will rise to a long run steady-state around 2.0% according to the Federal Reserve. Thus, the Fed rate will stay low and steady for some years to come. Assuming that the natural real rate is 1.5%, inflation would then keep falling to below 1.0% according to a stable Fisher Effect.

The Fisher Effect currently depends upon weak inflationary pressures. If there were strong inflationary pressures from aggressive fiscal policy or a rising labor share, inflation could escape the Fisher Effect and rise upward instead of fall. There is caution against that type of instability. There are measures to moderate inflation as the Fed’s reserves are bloated. It would be safer to keep the autoregressive coefficient below 1.0.

For the moment, inflation is falling along the dynamic path toward a lower inflation rate. So I conclude that α, the autoregressive coefficient, must be below 1.0.

Assuming from the above evidence that the Fisher Effect is active and stable, inflation will go lower the longer the Fed’s nominal rate stays near the zero lower bound. If the Fed were to raise the Fed rate, inflation would not fall as much. A higher Fed rate would lead to a higher Fisher equilibrium inflation rate. Theoretically, inflation would stop falling.

The Fed rate should have started rising over a year ago. Low inflation is a big concern. However, raising the Fed rate now is a complicated issue. There would be adverse effects globally. There are economically sensitive reasons to keep the Fed rate low. They don’t call it the liquidity “trap” for nothing.

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“Independent” Foreclosure Review Error Rate Vastly Higher

Yves Smith points to more OCC serving bank interests (not a surprise) in “Independent” Foreclosure Review Error Rate Vastly Higher Than Previously Admitted and well worth reading as usual:

At this point, it seems hard to add insult to injury, given the terrible track record of the OCC Independent Foreclosure Reviews. But it’s nevertheless been done.

By way of background, in April 2010 the Office of the Comptroller and the Fed issued consent orders to 11 servicers (three more were added later). The orders mandated that borrowers who had had foreclosures that were pending or had completed foreclosure sales in 2009 and 2010 could request an investigation by independent reviewers, selected and paid for by the servicers but subject to approval by the OCC. It was clear from the outset, however, that this consent order process was never intended to help homeowners in a serious way, but was intended to give air cover for predatory servicers.

Even so, the foreclosure reviews turned out to be an embarrassing and costly fiasco. The investigation was halted abruptly, as more and more leaks showed that the foreclosure reviews were anything but “independent”.

The only positive element of this sorry tale is that Elijah Cummings has soldiered on with trying to get to the bottom of this misconduct. I hope readers will call or write his office and thank him for his persistence.

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The Next Plague: Alzheimer’s

The Next Plague: Alzheimer’s

In the 1970s and 1980s, a plague called AIDS swept through this country. Like a medieval scourge it was mysterious, incurable, and ruthless as it killed those who were far too young to die.

Now, baby-boomers have reason to fear a new scourge: It won’t cut them down in their youth, but if they dodge heart disease and beat cancer they may find themselves trapped in their bodies, watching their minds dissolve.

Did you know that a woman who is now 65 stands a 20% chance of dying of Alzheimer’s? (See Michael Kinsley’s essay in the New Yorker.)

On Bloomberg View Matthew C. Klein has put together a booklet of “visual data” titled: “How Americans Die.” These stunning interactive graphs will startle you. For instance, were you aware that suicide has recently become the leading cause of violent death in the U.S.?

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Kudos to Ross Douthat for his rebuttal to David Brooks on Piketty. Now, who will rebut Douthat about recent tax-policy history?

It turns out that Paul Krugman is not the only NYT columnist/blogger who reads Angry Bear. Ross Douthat does, too!

Okay, seriously: Douthat’s delicate-ballet filleting of Brooks’s take on Piketty is priceless.

Now, maybe someone can fillet Douthat’s take on tax-rate increases for “Americans making (or inheriting) in the $100,000-$500,000 range,” which, he says, “is a demographic, it should be noted, that’s proven much more successful at resisting tax increases in the age of Obama than have the true plutocrats above them.”

Hmm.  You’d almost think it was the Republicans rather than Obama and the congressional Democrats who tried to restore to Clinton-era levels the Bush-era tax cuts for people in the $250,000-$500,000 range, and estate taxes, and that Obama and the congressional Dems put a halt to it. Unless, that is, you have no familiarity with the psychology term “projection.”  Or you just have a short memory.

This did happen in the age of Obama, though, so I guess it’s fine to suggest falsely that it was Obama’s choice. Obama orchestrated Republican obstructionism. Who knew?

And that Republican threat last December to shut down the government again, before finally acceding to some part of Obama’s tax-rate increases?  Or am I confused, and it actually was the other way around?

Elsewhere in his post, Douthat says the Democrats won’t propose higher tax rates on people in that income bracket because, if they do, people in that bracket won’t vote for them.  I guess he’s surveyed the many millions of people in that bracket who voted for Obama in 2012 despite his tax-increase proposals, and learned that they’ve had a change of heart since the election.

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Gail Collins (and me): Free Us From ‘Freedom’

To be fair, I don’t think Hannity had any idea about Bundy’s racial theories. However, it’s generally a good idea to be wary of lionizing people who go around saying: “I don’t recognize the United States government as even existing.”

Anyhow, Cliven was toast, although he did make an appearance on CNN, in which he explained that his racist remarks were all about — yes! — freedom. In this case, the “freedom to say what we want. If I call — if I say ‘negro’ or ‘black boy’ or ‘slave,’ I’m — if those people cannot take those kind of words and not be offensive, then Martin Luther King hasn’t got his job done yet.”

— Gail Collins, Of the Fox and the Cattle, NYT, today

I was happy, when I read that column this morning, to see that people are catching on to this rightwing “stick-the-label-’freedom’-onto-whatever-we-want-to-do” thing–this is very big at the Supreme Court these days–but now I’m having second thoughts.

I’ve always wanted a ranch out West.  And I don’t really recognize Cliven Bundy as even existing, nor the Recorder of Deeds in his county as even existing.  And if I can get a group of folks together who don’t either, I see no reason why I can’t fulfill my dream and have a ranch out West even though I can’t actually afford to buy one.

My dream involves horses, though; not cattle.  But there probably are some horse ranches in that county whose “owners” I don’t even recognize as existing, so while I don’t really want the land they claim is theirs–the Bundy ranch is big enough for my needs, and it looks nice–I’m sure my group and I can manage the horse-herding thing from one ranch to another.  At least as long as we have enough ammunition for our AK-47s.

The best part is that one of my senators–not Harry Reid; the other one–will be very supportive of me in this.  I can’t wait to vote for him in 2018.  If I haven’t shot myself with my semi-automatic by then.

I now want to see the Republicans regain control of the Senate.  So maybe I can convince the Democrats to feature ads quoting Heller on this whole freedom/Bundy issue.  I’m sure the Dems think that would scare some moderate folks into voting Democratic, so they won’t see my real purpose.  But I know better.  A lot of moderates want ranches in the West, too.

Wanna join me on the ranch?


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Will Japan ever understand the Fisher Effect?

Japan has had its discount rate in the zero lower bound range for many years. If the Fisher effect had any truth to it, we should have seen the real interest rate return back to its natural level of 1% or so. What do we see? (link to updated graph)

japan fisher

The graph shows Japan’s central bank discount rate, GDP yoy growth rate, CPI minus food and energy and the real interest rate. The real rate (green line) did in fact return to and stabilize around its natural rate of 1% just as the Fisher effect would expect. This evidence supports the long run Fisher effect.

Inflation did jump up in the late 1990’s which looks to reflect GDP reaching its natural level. GDP (red line) rose and then declined transferring the momentum of nominal GDP into prices (violet line).

The real interest rate stayed close to its natural rate from 2000 until the crisis. Then after the crisis, the real rate returned once again to its natural rate until Abenomics pushed inflation up above the discount rate. The real rate fell again.

The question now is… Is the inflation in Japan temporary? Will the real rate return to its 1% natural rate pushing inflation back down? Will Japan’s central bank keep the discount rate near the zero lower bound?

Will Japan ever understand the Fisher effect?

Update updated: Graph above has been fixed, thanks to Mark Sadowski. Here is  a graph just for the real interest rate based on Japan’s discount rate and CPI without food and energy.

japan real int

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Expected Real Interest Rates & the Fisher Effect

The Fisher effect is defined by Paul Krugman & Robin Wells in their textbook… Economics, 3rd Editon 2013, page 721.

“The expected real interest rate is unaffected by changes in expected future inflation. According to the Fisher effect, an increase in expected future inflation drives up the nominal interest rate, where each additional percentage point of expected future inflation drives up the nominal interest rate by 1 percentage point. The central point is that both lenders and borrowers base their decisions on the expected real interest rate. As a result, a change in the expected rate of inflation does not affect the equilibrium quantity of loanable funds or the expected real interest rate; all it affects is the equilibrium nominal interest rate.”

They say that expected inflation drives the nominal interest rate. Yet, in the next sentence they state that decisions are based on the expected real interest rate. Are they advocating the Fisher Effect? No, they are just presenting it in their book.

  • Suppose that you do not know where inflation will go in the future. What will you base your lending or borrowing decision upon? The expected real interest rate.
  • Suppose that you think future inflation will stay low because there is low effective demand in the economy. What will you base your lending or borrowing decision upon? Again, the expected real interest rate.

I am sure that Paul Krugman would agree, the expected real rate is what drives business activity the loanable funds market. So what is the expected real interest rate? 1% to 2%.

What is the expected future nominal interest rate in 2017? 2% according to the Federal Reserve. They plan to hold the Fed rate below the normal rate of 4% to keep the economy supported.

Therefore, expected future inflation is 0% to 1%.

Breakdown of Current Situation

Let’s say the real rate at the moment is less than -1.0% and it wants to rise to 1.0%. There is pressure for the real rate to rise according to the Fisher effect. As Krugman and Wells say, decisions for borrowing and lending are based on the expected real interest rate, which is 1% to 2%.

The critical point to understand at the moment is where the pressure is coming from to lower inflation. Is it from expected future inflation, expected nominal rates or from expected real rates? The answer is all of them. Yet considering that expected future nominal rates and expected future real rates are somewhat rigid, then inflation becomes the flexible variable. Inflation is being given the freedom to move. The Fed hopes inflation will go up, but it also has the freedom to go down.

Globally, we have a situation where the central bank (CB) rates are sitting in one position and waiting for inflation to react. The “long run Fisher effect” (LRFE) best manifests when the CB rate is sitting and waiting for inflation to move. Inflation is reacting by moving downward.
Next… Are there inflationary pressures to counter low inflation? At the moment no… Growth of labor income and real wages is mild. Labor share has fallen throughout Europe, the US, Japan and even China. Inequality is growing fast. Housing is subdued. The US dollar is stronger. Firms have monopoly pricing, which gives them room to drop prices in the face of low effective demand. In all, inflationary pressures are subdued. Thus, the overall economic conditions support low inflation.
Thus, you have a puzzle. Is the low inflation due to low effective demand or low central bank rates? Well, they work together to lower inflation.

So the combined dynamics of low effective demand and the LRFE move the real rate higher and inflation lower in the face of low and rigid CB rates.

The Key to Understanding the Solution

The pressure driving low inflation is coming from the expected real rates, not the low CB nominal rates. It is like a pressure cooker. The source of the pressure comes from the heat below, not from the tight lid. The low and rigid CB nominal rates constrain inflation like a tight lid on a boiling pot. If the CB nominal rates were to rise, room would be created for inflation to rise. At the same time, effective demand must rise by raising labor’s share more broadly throughout society. Higher effective demand gives impetus to inflation.

The combination of raising labor share and a higher Fed rate would generate higher inflation.

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