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Brad DeLong Rejoins the Reality-Based Community; Mark Thoma tells us why it is so

Even if his inspiration for doing so comes from (of all places) the HuffPo, This is spot-on:

Unless something big and constructive in the way of global economic policy is done soon, we will have to change Stiglitz’s first name to ‘Cassandra’ — the Trojan prophet-princess who was always wise and always correct, yet cursed by the god Apollo to be always ignored. Future economic historians may not call the period that began in 2007 the ‘Greatest Depression.’ But as of now, it is highly and increasingly probable that they will call it the ‘Longest Depression.’

Sadly, his prescriptions–good prescriptions, I hasten to note*–address the sources of the Depression, not the most direct solution. For that, we turn (staying in the popular press) to Mark Thoma (via, er, Mark Thoma):

Private investment could be increased by lowering the interest rate with monetary policy, but since the interest rate is as low as it can go, this won’t be effective.

Another solution is to raise private investment through mechanisms such as tax incentives. But in a stagnating economy, business confidence is low, and it’s unlikely this will have much of an effect. It’s worth trying, but it’s unlikely to be enough.

Yet another solution is to raise public investment; infrastructure spending is a frequently mentioned candidate. This is attractive for two reasons. First, investment in U.S. infrastructure has been lagging, which needs to be addressed independent of the secular stagnation problem. Second, while tax incentives amount to leading a horse to water and hoping it will drink, government investment is determined by fiscal policy. It can be whatever value Congress and the president want it to be.

This is why those who are worried about secular stagnation have repeatedly called for substantial investment in infrastructure. [link from original]

Give Mark extra credit for being one of the few economists willing to say publicly that Excess Reserves are not “investment,”** even as he hedges whether “secular stagnation” is the current reality.

*”What we need now is 1) debt relief to unwind the overhang and 2) much tighter financial regulation to prevent the growth of new fragilities.”

**He doesn’t take the next step and state that IOER is being paid because banks are insolvent and robbing the Fed is a victimless crime, but we shouldn’t expect everything.

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Edward Hugh, RIP

I’m still not here,* but do want to note the official confirmation that One of the Good Ones

Yes, Brad, He Has

This has produced another edition of “Simple Answers to Simple Questions.”

Just to expand this a bit, and to deal with the 1987 absurdity, the proximate cause of the 1989 adjustment—an adjustment of less than 10% in the Dow that only took two full calendar months to return to its level at close on 12 October—was that a certain Japanese bank (for which I happen to have been trading derivatives at the time) declined to go forward with LBO funding for United Airlines.

You’re welcome to believe that one, but no one at the bank did. And I don’t remember there being any reference to it when Gillian Tett wrote that firm’s obituary.*

*It is saddening to note that of the three firms where I worked that failed in spectacular displays of mismanagement, the chronicler of the failure goes from Gillian Tett to William D. Cohan. It’s like having Robert Caro write the first chapter, but only being able to get Kitty Kelley for the next.**

**The third’s obituary was never Writ Large. By this, from August of 1991, certainly belies the idea that “Real Estate Only Goes Up” would be the conceit of anyone with a sense of even recent American history:

Security Pacific surprised Wall Street with poor financial results in three of the last four quarters, partly because of problem real estate loans in Britain, Australia and Arizona and the cost of quitting certain businesses. The weak California real estate market has casts a cloud over all California banks.

Taking on Security Pacific’s loan portfolio could present a major risk for BankAmerica. However, the bank’s officials said they had thoroughly examined Security Pacific’s portfolio. Other industry analysts said that any new problem loans could be compensated for by the savings in expenses because of the merger.

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Quote of the Day Last Thirty Years of Economics

From, naturally, Robert Waldmann, chez DeLong, pointing out that the Emperor not only has no clothes, but has been deliberately strutting his lack of stuff since the late 1970s:

Oh another thing — [the problem with economic modeling] isn’t [limited to] new classical macroeconomics. The same criticisms apply to new Keynesian DSGE models. Adding totally unexplained Calvo alarm clocks doesn’t liberate the model from the implausible assumption that there is a representative agent. In fact, the current standard NK model (Eichenbaum, Christiano, Evans, Smets, Wouters) has to add implausible Calvo alarm clock conditional markets to reconcile the assumptions that there is a representative consumer and that there are different types of labor with variable relative wages.

The effort to reconcile DSGE with reality is based on doing whatever it takes to make a DSGE model behave like an old Keynesian model (that is fit the data as old Keynesian models do). Academic macoreconomists ignore the proposal to cut out the middle man who transforms assumptions we don’t believe to implications which we know are valid from empirical research, because we are the middle men and the sensible short cut from what we know to what we know would achieve greater efficiency by eliminating our jobs.

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A Carleton S. Fiorina Finger Exercise

Brad DeLong catches Tim Berners Lee Timothy B. Lee [h/t Bob in comments] being, to be nice, disingenuous:

…The idea was that [HP and Compaq] would be able to do the things they already did more effectively if they joined forces. Management consultants who examined the merger for HP found that (as Fiorina loved to put it) HP and Compaq ‘fit together like a zipper’…

Stop right there: when you are reduced to quoting management consultants hired to make the case for the deal the CEO wants to do, you are demonstrating that you have no good arguments.

Brad is being too nice. Here’s the Daniel Davies-style Finger Exercise:

  1. A CEO runs a company with an annual ROE of X. They are considering buying a company of similar size that (best case) products that might be complementary to—but also modular to—the company’s highest-margin good.
  2. The company to be aquired has a current annual ROE of Y. Y is significantly less than X, and the company’s primary market continues to become increasingly commoditized.
  3. The CEO tells you they are doing this in an attempt to increase the company’s margins (which should in turn increase company ROE).


1) Attempt to specify an algorithm that can justify your claimed expectations. Caution: use of negative coefficients is not permitted.

Use your results to answer the following questions:

2) Is there anyone with math skills greater than the average third-grader who couldn’t see at the time that this was sheer idiocy?*

3) Would you be surprised if that CEO were fired and never again offered the opportunity to run a company of any size?

Bonus Question:

4) Even granting West Coast bias, why would anyone looking at Fiorina’s performance at Lucent have been silly enough to offer her the job at HP in the first place?

*Exclude Carleton S. Fiorina and Michael Eisner from possible answers

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Marking Beliefs to Market, Stan Fischer edition

Brad DeLong Friday morning:

I cannot help but note strong divergence between the near-consensus views of Fed Chair Janet [Yellen]’s and Fed Vice-Chair Stan [Fischer]’s still-academic colleagues and students that tightening now is grossly premature, financial markets’ agreement with the hippies as evidenced by the ten-year breakeven, commercial-banker and wingnut demands for immediate tightening, the extraordinarily awful performance since 2007 of not all but the average regional Fed president as revealed in the transcripts, and the Federal Reserve’s strong predisposition to an interest-rate liftoff soon.

Prolix but accurate, and with the strong implication that Yellen and Fischer Know Better, but are constrained by their cohort.

Stan Fischer, Saturday morning (via Mark Thoma, whose presentation is more accurate and informative):

[B]ecause monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening.

As I said before—to the apparent dissatisfaction of those who want to be polite losers or believe that “well, they’re saying the right things now” is redemptive and not damning— who of the Sensible Technocrats is worth the trouble of paying attention to when they have a chance to do something in government and make a point of forgetting everything they have learned?

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Serious Question, Janet Yellen Edition

In spite of a sustained lack of inflation, a large, sustained gap in the Civilian Employment/Population Ratio, an abiding lack of post-recession growth domestically, and significant underperformance (old, new, [PDF] and overall) internationally, the Fed appears prepared to raise interest rates this year. Which leaves me now wondering:

With the possible exception of Robert, is there any former colleague/roommate/coworker of whom Brad DeLong has spoken highly who is worth the trouble of paying attention to when they have a chance to do something in government?*

My top-of-the-head list is:

  1. LawrenceLarryH. Summers (the RoboQB of the Econ field, in more ways than one)
  2. Tim Bloody Effing Geithner (all links but one to Brad in his post-Chief Internet Geithner Apologist days)
  3. Andrei Shleifer
  4. Christina Romer (though I’ll be the second or third to stipulate that It Wasn’t Her Fault; see above), and, now,
  5. Janet Yellen

What good is alleging that you have sharp, respectable people who Know What to Do if they then Don’t Do It? When the perpetual answer you get when they screw up is a variation on “You said you regretted not doing more. What do you regret not doing?”

*Robert isn’t and hasn’t been, so far as I know, in a position to make policy. So whether he counts as an exception is left as an exercise.

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Or Is It really a Kenyan this time?

Carter, Begin, Sadat, Brezhnev, and Deng are all long gone.

Rumor has it that the last political icon of Tim Curry’s only pop hit has joined them.

Or has he?

The death of Fidel Castro, 88, has also often been mistakenly declared before on social media and this time may have been confused with the recent death in Nairobi of Fidel Castro Obinga, the son of a prominent Kenyan politician.

Either way, an excuse to “kill your ears, man.”

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