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

Manchin on Voting Rights

The news is that Joe Manchin has described a voting rights compromise which he supports. Also Republicans immediately said it was unacceptable to them. This reminds everyone that there will be no bipartisan compromise on an issue where the two parties have diametrically opposite interests. If there were any Republicans who did not equate democrats with Democrats, and pigs could fly, it would be different, but there aren’t.

I am reasonably confident that nothing will come of this. To pass a bill it would be necessary to eliminate the filibuster and Manchin (and Sinema) won’t do that. However, I am actually interested in an incredibly vague part of Manchin’s proposed bill “Ban partisan gerrymandering and ‘use computer models,’ the latter of which isn’t further specified;”

It does seem that “computer models” doesn’t narrow things down much. However, I think it is quite simple really. It is possible to use precinct level data to calculate the ratio of Republicans elected to Republican votes statewide implied by districts. It is easy to compare proposed districting with the rule that if the ratio is closer to one with one set of districts then it must be preferred. The only non obvious detail I propose is that the results of the most recent 2 elections be used, because the turnout in midterm elections is very different from that in presidential year elections.

I would propose that only if two proposed sets of districts have the exact same estimated partisan bias according to this formula may any other properties of the districts be considered. I am reasonably confident that the bias can be reduced to the fact that we can cut congress people in half (even if the idea is sometimes appealing). In any case, the party with a minority in the state legislature has a very strong incentive to look very hard for proposals to reduce the bias.

I often read that Democrats are necessarily automatically at a disadvantage, because, even aside from partisan gerrymandering, Democratic voters are concentrated in cities and so many Democratic votes must be wasted. I do not believe this at all. Rather I think not explicitly partisan rules about compactness and respecting municipal and county boundries if possible favor the Republicans. There is no reason such rules deserve consideration at all comparabile to the importance that legislative majorities correspond as nearly as possible to the popular vote. I think that (except of course for the US Senate) they can correspond almost exactly.

I would like a law requiring that they do.

Again, I don’t expect to get it, or anything, but the problem is very simple, and the solution is obvious.

JOLTS

I am wondering about Job Openings and Labor Turnover Survey (JOLTS) data. The reason is that I am interested in the extremely record high job vacancy rate of 6%, the moderately high unemployment rate of 5.8% and the moderately high hiring rate of 4.2% of employment in April (last month of data available). There are reports of firms having trouble finding workers, including the results of systematic surveys. Republican governors have decided to send money back to the Federal Government rather than pay the additional $300 per week unemployment benefits, because they think the over-generous benefits are causing the unemployed to turn down jobs they should take.

Others insist that the problem is childcare with unemployed parents staying home, because only about half of schools had restarted in person classes, or fear of Covid 19 keeping people home until they are vaccinated (or my favorite theory: those who are half vaccinated not wanting to combine the joys of a new job and a booster shot).

To me the question is whether there is something unusual a huge vacancy rate and a moderate hiring rate. So I went to FRED and looked at some graphs, which I feel like sharing.

Larry Summers and the Growth Convincing Argument

First I should note that at a time when I had totally messed up my life, Larry Summers saved me from well earned unemployment. As my PhD Supervisor, he was amazingly patient about the amazing delays preceding my actually producing anything along the lines of a written document.

The title is a reference to a hypothetical dog.

an economics professor, Solomon Fabricant, coined the term ”growth recession” to describe a period in which the economy slows dramatically but keeps sputtering forward. 

[skip]

Not everyone approved of the term. Herbert Stein of President Nixon’s Council of Economic Advisers suggested that one might as well call a dog ”a growth horse.”

(by the way, I just linked to an article in the New York Times written less than 3 years after I graduated from college written by a guy who graduated the same day (and place) I did. WTF !!! (clearly he doesn’t have the same problem with deadlines that I do).

Some time ago, Summers wrote

Every time the Fed has hit the brakes hard enough to slow growth meaningfully, the economy has gone into recession.

Some time later, I read his op-ed. I immediately thought “what about the growth recession of 1965?” Some time later, I looked at data and found it was the growth recession of 1966 or maybe 1967 but definitely not 1965. Still later, I made a graph. Finally today, I might or might not publish a post on the topic.

I am inclined to ungratefully assert that Summers’s claim is tautological, false, or both (it’s hard to be both but “or” makes the claim true).

Going back to my childhood, In 1966, the Federal Reserve open market committee (FOMC) was clearly concerned about over-heating — there were two wars — one in Vietnam and one on poverty — the unemployment rate fell to below 4% which was considered dangerously low (also before Milton Friedman coined the phrase “natural rate of unemployment” which was not at all a new concept to people like Samuelson and Solow . Quarterly real GDP growth reached and annualized (I mean multiplied by 4) rate of The FOMC cranked the Federal Funds rate up to the then shocking level over 9.73%. The FOMC cranked the Federal Funds rate up to 5.76% (it was 2% in 1961). I’m not saying that they were following the Federal Funds rate (I have not and probably will never read their minutes and do not know on which interest rate they were focused).

The result was a very meaningful reduction of annualized quarterly GDP growth from over 9.21% in 1965Q4 and 9.73% in 1966Q1 to under 1.37% in 1966q2 and under 0.25% in 1967Q2. I call that slowing growth “meaningfully”. However, the NBER business cycle timing committee did not call that a recession.

1966 was a long time ago, but 1981 wasn’t yesterday. I think that was the last time that the FOMC decided to hit the breaks. I classify the last 4 recessions and 3 bubbles bursting, two financial crises, and a Covid Epidemic. None was preceded by accelerating inflation (the alarming acceleration from 1 to 3% was long long ago).

So what was Summers thinking ? I am tempted to insinuate that he defines a meaningful decrease in GDP growth as a reduction to less than 0 which lasts at least 2 quarters — in other words, a recession. So the claim becomes “whenever the Fed triggers a recession, the Fed triggers a recession” which tautological, but he is much much too smart to do that. I think one argument is that the FOMC didn’t manage the task, because core inflation reached the alarming level of almost 5% and then there was a recession in 1970. However, I don’t think that 4 years later is “whenever” by business cycle standards. Also the recession caused unemployment to reach 6.1% and unemployment is now 6.1%. I don’t think that the risk that unemployment might reach 6.1% at some time in the indefinite future is critical right now.

I ask what would happen if the Fed learned how to prevent over-heating without causing a recession ? I answer that one might have 4 decades without overheating, which does not imply 4 decades without a recession.

More after the jump.

QE After Action Report

I think it is now possible to look back on the debate on the effectiveness of non-standard monetary policy at the (near) zero lower bound. I will now “mark my beliefs to market” – J B DeLong.

I think it is also a mildly worthwhile exercise, because it is relevant to the current debate about fiscal policy. A key argument for massive fiscal stimulus, well greater than any estimated output gap, is that making predictions, especially about the future, is harder than usual. This strengthens the usual argument that, as the Federal Funds rate is near zero, it is better for fiscal policy to be too stimulatory, because interest rates can be raised if the economy overheats but can’t be cut if it underheats. Given the huge uncertainty, there is a case for huge stimulus — maybe even more than the American Rescue Plan (as in maybe it’s time for an infrastructure bill and a family assistance bill). This argument would be invalid if stimulatory monetary policy were effective at the lower bound.

So was it ? The generally agreed extreme case of aggressive non standard monetary policy was Japan, where Haruhiko Kuroda vowed to do “Whatever it takes” to boost inflation. The Bank of Japan (BOJ) did things which the Fed absolutely is not allowed to d; it purchased stock (owning about 7% of market capitalization) . It declared a 2% inflation target which was explicitly a floor not a ceiling.

Of course it did not achieve this target. The only period of on target inflation was due to a 2014 3% increase in VAT which was in fact added to consumer prices. The declaration by PM Abe that he was really going to do this also caused an increase in expected inflation at the time Abe appointed Kuroda. This shows the power of fiscal policy *the VAT increase was followed by a recession).

Similarly annualized quarterly real GDP growth shows that “Whatever it Takes” March 2013 was followed by negative GDP growth in two quarters, then the sharpest downturn after the 2008 crash and before Covid 19 in four quarters. I don’t see how there could be stronger evidence that Fiscal policy trumps monetary policy when interest rates are at teh zero lower bound.

The evidence from the USA is similar

Slowly Boring into the Heart of Wokeness

Matt Yglesias is stimulating heated discussion — that’s his job. Before getting to the point, I think that his $250,000 guaranteed advance from SubStack has stimulated a lot of extremely intense envy (I know I envy him) which tends to add a bit of spice to his provocative posts one of which is

Tema Okun’s “White Supremacy Culture” work is bad a diatribe contra someone of whom I have never heard. I think the tone is harsher than it has to be (see provocative) but mostly like the essay very much. I will discuss it after the jump.

But before the jump I would really really like to note a certain cognitive dissonance in the essay. Here are a few block quotes of Yglesias:

The craziest thing about “The Characteristics of White Supremacy Culture” is that it has literally nothing to do with race.

later

She doesn’t put forward any evidence or arguments in favor of her claims (and indeed, “objectivity” is seen as a manifestation of white supremacy culture),

and finally

Beutler & Yglesias on Strategy

I am going to comment on two smart guys who believe that they disagree about the optimal political strategy for Democrats.

Brian Beutler wrote an interesting essay criticizing what he calls “issue polling essentialism”. It includes the text

The topic occurred to me after I recorded last week’s Rubicon with my friend Matt Yglesias, where we took different sides on the question of how determinative issue polling should be in setting progressive priorities. We are no longer friends. (Just kidding. Unless…? Better listen to the episode!)

I trust they are still friends, but Yglesias is a bit peeved. He wrote this Thread beginning “I think this piece does not describe the position it is critiquing accurately.”

In fact, after mentioning Yglesias, Beutler goes on to critique a poll obsessed straw man. I trust they are still friends, but that was sloppy.

I have comments on both.

I agree with Yglesias’s non obvious tweet “2) Issue activists associated with the Democratic Party (and more to the point, those who fund their activities) should care more about raising the salience of topics that are likely to help Democrats win, and less about raising the salience of the specific issue they work on.”

The implicit claim is that, whatever they care most about, they won’t get if Republicans are elected, so issue activists should help Democratic party candidates by sticking to the party line *then* press them on the specific issue they work on (with implicit threat to make trouble ?). I agree. This is psychologically difficult — people talk about things they care most about and it involves other than complete frankness and being a hack. There is a conflict of material interests as advocacy groups which echo the party line don’t get attention and donations. That’s why the appeal is directed at “those who fund them”. The tweet is cynical (Yglesias introduced the phrase “the hack gap”). Also, I find it very convincing.

I have criticisms of Beutler after the jump.

Covid 19 One Dose or Two IV

Angrybearblog December 22,2020 “Eyeballing, the first shot looks 80-90% effective.” (Moderna) and “my guess is that the first shot was about 90% effective over this period.” (Pfizer).

Angrybearblog December 24,2020

New England Journal of Medicine February 17 2021

We used documents submitted to the Food and Drug Administration2 to derive the vaccine efficacy beginning from 2 weeks after the first dose to before the second dose (Table 1). Even before the second dose, BNT162b2 was highly efficacious, with a vaccine efficacy of 92.6%, a finding similar to the first-dose efficacy of 92.1% reported for the mRNA-1273 vaccine (Moderna).3

With such a highly protective first dose, the benefits derived from a scarce supply of vaccine could be maximized by deferring second doses until all priority group members are offered at least one dose.

You read it here first

What The Democratic Senators Were thinking

As is very rare, I find myself disagreeing with Josh Marshall who asked “What Were the Democratic Senators Thinking?” when they agreed to accept Representative Jaime Herrera-Beutler’s assertions (that Trump sided with the insurgents over minority leader McCarthy’s) in writing when Trump’s lawyers stipulated that they could be assumed to be accurate.

First, I will play amateur lawyer (and link to an actual lawyer who contested Marshall and was posted by Marshall) — the managers said they asked to call witnesses specifically to present that (hearsay) testimony. After listening to their closing arguments it is clear that they were being frank — the testimony was critical to their case against Trump. Assuming it is accurate (as agreed), it proves that Trump was not horrified to find his supporters were smashing the windows of McCarthy’s office, that even if their actual fighting when he called on them to “fight like hell” was due to a misunderstanding (as absurdly argued by his lawyers) he chose not to explain to them that their violent actions were unacceptable (even though he later falsely asserted that the violence hadn’t occurred). As explained by the managers, his reaction is proof of his support for violence and that his (already obvious) incitement to violence was incitement.

As an added bonus, Trump’s lawyer committed gross misconduct when he said that, even though they stipulated that the claims are accurate, the claims weren’t accurate. I’m not a lawyer, but I am sure that to “stipulate” is to commit to making no such claim — that stipulating then breaking the promise by contesting is misconduct at least approach contempt of, in this case, the Senate. The utter humiliation of Republican Senators who are lawyers (who will ignore the evidence and the constitution) is heightened by forcing them to pretend that it is OK to stipulate then unstipulate.

Marshall (and many many others) describes the events as Democrats backing down. Notably they got exactly everything they said they wanted (and also clearly what they needed to make their closing arguments). The discussion focuses on TV scheduling (and yes TV is powerful) and on doing whatever (45) Republicans don’t want to show who’s boss. This is all important (most Americans are, like me, not lawyers and care about show and not rules of evidence). I think Marshall is right when he wrote “This decision signaled a failure to grasp the damage sustained by deeply demoralizing your supporters. It opens those who defend them to ridicule and contempt.” It is possible to argue that the Democrats got everything they wanted (for one thing it just requires assuming they meant what they said and noting what new evidence they wanted in the record and that they got it and a promise that it not be contested). But it was bad politics as theater and, with the outcome not in doubt, the whole trial is theater.

Here I think it is possible and useful to argue that the Democrats won by getting exactly what they wanted (exactly what they said in advance that they wanted). I think that is the proper response to ridicule. Or to put it another way, if the problem is that it looks like a defeat and surrender (even though it isn’t) maybe Democrats not in the Senate should try to explain that the Democrats won the confrontation (as they did) rather than lament the fact that it appears that they caved (which they didn’t).

Marshall is also right that the trial can’t be allowed to delay confronting problems which can be solved (unlike Republican’s shameless hypocrisy). Testimony would not have been collected quickly (especially because Republicans are eager to obstruct everything). The trial would have to wait for depositions and resume when the Senate should be fighting Covid. Actually addressing people’s problems is the way to (maybe possibly) survive mid term elections. Also it actually addresses people’s problems which is the point of politics.

I think part of why I praise what Democrats did today in the Senate is that I have heard the summary arguments. I know why it was necessary to get Herrera-Beutler’s assertion in the record, and I know how devastatingly convincing the summary arguments are. Also

Debt and Summers II

Larry Summers has responded to his critics. My first thought is, yes he is still really smart.

Also Olivier Blanchard also thinks the Covid Relief bill is too generous, and, in particular objects to the $1400 for most Americans. Note that Blanchard is the author of the main citation in my critique of Summers (although I should also have cited Summers on secular stagnation, Delong and Summers on the Keynesian Laffer Curve and Blanchard and Summers on hysteresis).

Summers makes 4 arguments.

Don’t blame me for the fact that the ARRA was too small. Here I think it doesn’t really matter, and that he is mostly right. Certainly he argued frequently for higher deficits.

Fearing Secular stagnation does not imply that one prefers $1.9 Trillion in stimulus to $ 1 Trillion. Indeed, the debate over the right number is almost completely qualitative.

The Fed has trouble fighting inflation without causing recessions. ” Every past significant inflation acceleration has been quickly followed by recession. Tamping down inflation will require allowing unemployment to rise, and engineering a soft landing is difficult:Unemployment has never risen by half a percentage point without then rising by almost two points, or more.”

This argument seems to me to beg the question. Summers assumes that the Fed can’t prevent an increase in inflation or moderate an increase in unemployment. If the Fed has prevented an accelaration of inflation, the success would not show up in Summers’ survey of what happens after inflation accelerates. If the Fed keeps unemployment at the NAIRU then unemployment does not have to increase to fight inflation. I think his point is that, when the Fed loses control and misses its target, then the Fed loses control and misses its target. There is no argument that fiscal stimulus (of any amount ever) makes it more difficult for the Fed to avoid both accelerating inflation and recession. The only clearly demonstrated limit on the Fed’s ability to thread the needle is the zero lower bound. That problem can be avoided with fiscal stimulus.

Also I note that qualifiers “significant” and “quickly” are doing a whole lot of work. The steady increase in inflation from 1964 through 1970 was followed by a recession in 1970 — the longest post world war II expansion which occurred before Summers began working for the Federal Government was mostly a period of accelerating inflation. Also the period of increasing inflation which began in 1976 was followed by a recession in 1980. Here I think the point is that inflation drops during recessions, so one sees peaks when recessions start. That just means that there is a Phillips curve. Mostly, the argument is that the Fed used to mess up more than 40 years ago, so the past 40 years of preventing acceleration of inflation are irrelevant.

The fact that many economists argued that the economy was overheating in the late 90s and just before Covid hit and that inflation would accelerate and then it didn’t seems relevant. Finally, I have never understood why inflation is considered such a horrible thing — I didn’t understand all the fuss in the 1970s and I still don’t. I do know that people hate inflation *and* assume it means increased prices for given wages. Economists note that wages and prices both increase, but also accept the conclusion that inflation is horrible.

But mostly, there is no argument for why the Covid relief bill will make the Fed’s task more difficult.

Summers 4th argument comes in two steps. He responds to the argument that the bill provides “relied to those who need help”.

Much of his argument is based on the assumption that things were fine in 2019 consumer spending by low-income consumers is up“, “cash balances have risen“, “see their incomes rise“. But Summers does not believe that things were fine in 2019 — he believes that income inequality was a huge problem in 2019.

His concluding sentence specifically criticizes the $1400. This, I think, is his arguably valid point. He can think of better uses of the money. However, policy depends on politics, and that exceedingly popular provision will be part of any bill. I guess he contributes to the debate over the income level at which the benefit is to be phased out, but this becomes an argument about a moderate change to about one fourth of total spending mere tens of billions not real money.

I will discuss Blanchard after the jump.

Debt and Taxes IV: This Time It’s Personal

It seems that many people have concerns about Larry Summers’s concerns about overdoing the Covid 19 Relief bill. My first reaction to his op-ed is here, but I realize that I had more nearly relevant things to say in the Debt and Taxes series and, in particular in debt and taxes I and debt and taxes II. (the one with plain ascii algebra and only 2 comments but I promise it is relevant).

I’m going to try to focus. First, Summers really criticizes giving an additional $1400 to most US citizens. He discussed the bill in general, but his concerns are about the wisdom of that (huge) provision and not the money for supplementary unemployment insurance, unemployment insurance for people not eligible for regular unemployment insurance, money for vaccine distribution, money for schools or general aid to state and local governments (indeed he could have been clearer in his op-ed).

On this he has two concerns

  1. The huge deficits might overstimulate the economy
  2. There are other better uses of the money so the bill is a waste of economic and political resources.

This time, I am going to address them in reverse order. Concern 2 really regards the $1400 checks only. On economic resources, I question the absolutely standard argument that one must decide if some spending is the best use of limited available funds. The key issue (as in the debt and taxes series) is that the US Federal Government can borrow at extremely low interest rates — the 30 year real interest rate is currently negative . Since it will change, I am going to screen cap.

Investors are glad to pay the Treasury to keep their wealth safe. Now consider the US Federal Government intertemporal budget constraint — the present value of spending must be less than or equal to the present value of revenue. What is the present value of revenue ? It is calculated by discounting revenues which grow approximately proportional to GDP by the inflation rate which hmm carry the one, round off a bit works out to roughly INFINITY.

If the Treasury can borrow at an interest rate lower than the trend rate of GDP growth (r<n), then the US Federal Government does not have a binding intertemporal budget constraint. This is the point of debt and taxes I, which turns out to be highly relevant to the Washington Post opinion page printed the day before yesterday. A totally standard calculation implies that there is not now a limit to “economic space” now. This is the normal pattern post WWII except for the period 1980-2000 — indeed the US managed the huge WWII debt with no noticeable trouble. Another way of putting this is that, if r<n then debt never has to be repaid. It can be rolled over forever and will shrink as a fraction of GDP until it is negligible. This is not a heterodox position — the link is to an AEA Presidential Address which is the epitome of orthodoxy.

Summers is also concerned about political limits to other spending. That is the real issue. It is outside of my field of expertise (it is also outside of his officially credentialed field of expertise, but he is clearly generally expert). Many people (too many to link so I will stick to Waldman) have argued that the political limit is public approval of Democrats and is relaxed by giving people what they want. I think it is clear that Democrats suffered in 2009 and 2010 from reckless caution — the backlash was related to doing too little and caring too much about keeping the public debt low. Notably Summers argued this repeatedly from 2010 through 2020 (I just googled [Summers fiscal).

OK now the hard part: what about overstimulating ? The first point is that we will not have to accept inflation higher than we desire. The Federal Reserve Open Market Committee (FOMC) can cool down an overheated economy by raising the target Federal funds rate. It is clear from bond prices that investors don’t expect this — bond prices would fall if they did and they have increased even as Democrats won control of the Senate and turned out to be very determined to add to the deficit. Low nominal yields imply that investors don’t expect interest rates to go up. The lack of much change in the difference between nominal ant TIPS yields implies they don’t expect inflation to increase and their expectations about inflation have changed little. Before going on, I note that the high interest rates used to cool down an overheated economy have some but very little relevance for the infinite present value of future revenues calculation — a few months of high interest have a finite effect on the calculation which, again, yields the answer infinity. Just to repeat what is often noted by Summers and others (especially Krugman) the risk of stimulating the wrong amount is extremely asymmetric — the FOMC can raise interest rates and prevent overheating. it can’t lower interest rates much, because the current safe short term interest rate is 0.08%. It is, as Summers notes in his op-ed, much better to err on the side of excessive stimulus.

The real issues are that loose fiscal and tight monetary policy will crowd out private investment and drive up the value of the dollar. In my debt and taxes series, I considered a closed economy, so I will just note that the FOMC absolutely can keep the value of the US dollar down. The Fed just has to sell it’s dollar denominated assets and buy foreign currency denominated assets. A monetary authority which is trying to prevent depreciation of the national currency can run out of foreign exchange reserves — a monetary authority which is trying to prevent appreciation can’t run out of domestic reserves — it can create unlimited amounts at will.

So should we worry about crowding out private investment ? The first point is that the investment which will be crowded out is investment in structures (not equipment and software). High interest rates reduce the value of long lived assets which, in the real world, means buildings — mostly houses. The investment relevant to macroeconomists and IS curves and such is mostly to almost entirely residential investment which is left out of almost all macroeconomic models (all models I know of the weasel word “almost” was added from an abundance of caution). Even huger houses are not the way the US will deal with slow productivity growth or stagnant real wages.

But also, the fact that the *safe* interest rate is below the trend rate of GDP growth implies that higher welfare can be obtained with lower private investment. The fact that the expected return on the private investments is greater than the trend growth rate does not rule this out. This is the point of debt and taxes II

Importantly. In that model, it is simply assumed that the economy is always at full employment. There is no possible role for stimulus, in fact no way to drive up output in the short run. It is simply assumed that public debt crowds out private investment one for one. Furthermore it is assumed that all private investment causes higher wages, because all private investment is in plant and equipment used by workers. In spite of all those crazy assumptions (which hurt the case for more public debt) it is shown how to make everyone (in the simple model) better off with a policy which starts with the government just borrowing and giving the money equally to everyone.

The model exactly addresses the question of whether it is good policy to send everyone a check even if there is no need to stimulate, no GDP effect of stimulation, and a fiscal multiplier of zero. The answer is that yes it is good policy so long as the government pays an interest rate lower than the trend rate of growth of GDP, and so long as the distributional effects are handled by increasing taxation of capital income and reducing taxation of labor income (a policy for which there is an abundance of political space and also one which Republicans will resist even at the cost of electability which uh is a cost I am eager to let them bear).

After the jump, I will go on and on about the model