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

Irish Austerity Exodus Continues

The Eurozone experiment in austerity continues to fail as the peripheral countries endure ongoing cuts. Following up on my post of August 15, it’s time to look at the most recent Irish immigration data to update it through April 2013 (Ireland records population data from May 1 to April 30) and see how it affects the reported unemployment rate. The picture remains ugly, with emigration climbing once again, from 87,100 in 2011-2012 to 89,000 in 2012-13. Immigration increased by 3200, so net emigration fell by 1300, with net out-migration over the year declining by about 3% to 33,100. Here are the details:


  Year ending
April 2012 April 2013
Immigration 52,700 55,900
Emigration 87,100 89,000
Net migration -34,400 -33,100
of which Irish nationals -25,900 -35,200

Source: Central Statistics Office Ireland

Take a good look at the last line: Net emigration by the Irish themselves increased by 35.9% and accounts for all net out-migration; there was net in-migration by non-Irish citizens of 2100 in 2012-13. Indeed, the Irish comprised 57.2% of all emigrants in the most recent report.

Tax Policy Center* Says Romney Lies

Mitt Romney proposes reducing tax brackets by 20% and cutting the estate tax (to zero IIRC). He will keep or expand favored treatment of capital gains and dividends. He claims that he doesn’t plan to cut taxes for the rich. He claims that he will avoid such cuts by eliminating deductions, credits and exclusions. One of his claims must be false as they are arithmentically inconsistent.

update: Beyond parody. Romney aid Lanhee Chen says that the Tax Policy Center conclusion that Romney’s proposal is gives to the rich is “biased” because it ignores Romney’s proposed corporate income tax cuts

“The study analyzes only half of Governor Romney’s tax program, ignoring the reforms that would make America’s corporations more competitive by moving from the highest corporate tax rate in the industrialized world to one that is comparable to our trading partners.”

Yep that’s the way to convince the public. Note that, in addition to tax cuts for rich people, there are tax cuts for corporations. Importantly Chen does not deny that Romney lied when he said he didn’t seek tax cuts for the rich. Chen’s line is the usual supply side trickle down line that tax cuts for the rich and for corporations will help the non rich by causing greater growth. I know of no evidence which supports this claim.

I almost feel sorry for the Romney campaign.

In other breaking news (from 2002) Romney claimed he was resident in Utah in 1999 and 2000 before he claimed he was resident in Massachusetts in 1999 and 2000.

I can’t keep track of his lies (hell Steve Benen has trouble). Wouldn’t it be easier to keep track of his non-lies ?

A new report from the Brookings Institution and the Tax Policy Center includes the following.

The key intuition behind our central result is that, because the total value of the available tax expenditures (once tax expenditures for capital income are excluded) going to high-income taxpayers is smaller than the tax cuts that would accrue to high-income taxpayers, high-income taxpayers must necessarily face a lower net tax burden. As a result, maintaining revenue neutrality mathematically necessitates a shift in the tax burden of at least $86 billion away from high-income taxpayers onto lower- and middle-income taxpayers. This is true even under the assumption that the maximum amount of revenue possible is obtained from cutting tax expenditures for high-income households.

Amazingly, even if they accept Greg Mankiw’s estimates of the effect of rate cuts on growth (which assumes no increase in the deficit even in the short run). They still conclude that a Romney claim must be false.

Nevertheless, even if one were to use the model from Mankiw and Weinzierl (2006) and assume that after five years 15 percent of the $360 billion tax cut is paid for through higher economic growth, the available tax expenditures would still need to be cut by 56 percent; on net lower- and middle-income taxpayers would still need to pay higher taxes.

This analysis will come as a complete shock to exactly zero Angrybear readers (including the conservatives) but might stimulate discussion in comments.

* Title corrected. The Tax Policy Center is a joint center of the Brookings Institute and the Urban Institute not a separate entity.

Is Ireland the Poster Child of Growth?

by Rebecca Wilder

Is Ireland the Poster Child of Growth?

I wanted to familiarize myself with the economic statistics in Ireland, so I thought that I’d share my findings with you all. Many politicians refer to Ireland as the poster child of austerity – according to the contentious thesis of expansionary austerity (a review from the IMF .pdf here), is it therefore the poster child of growth? In this post, I review the cyclical data and find that the Irish economy is quite divergent with optimism only evident in the industrial and export sectors. In aggregate, there’s really been no momentum at all.
On the one hand, the industrial sector seems to be holding in okay, with the manufacturing PMIs remaining above 50 since March 2012. Furthermore, international saving, or the current account, moved from a 6% of GDP deficit in Q3 2008 to a small surplus in the fourth quarter of 2011 (4-qtr moving average). However, the current account has been deteriorating slightly at the margin, beginning in the second half of 2011.

Note: Except where noted in the legend, all charts below relate to the Irish economy.

In contrast, the consumer sector is suffering quite explicitly. After yesterday’s revisions to previous months, we now see the harmonized unemployment hovering near its peak rate, 14.6% in May vs. 14.8% peak (in the chart below, the red line maps the pre-revised unemployment rates). Consumer confidence is very low, which implies that retail sales could tumble a bit in coming months. Furthermore, price inflation lost some steam, although it remains above the deflationary period that ended in 2010 by the headline measure. Core inflation dropped off in the last couple of months to just 0.4% Y/Y in May. Finally, for all of the optimism on Ireland, Q4 2011 GNP and GDP are just 1% and 0.7%, respectively, higher than their 2010 lows.

It’s probably too early to fully discount the orthodox expansionary austerity thesis – but at the minimum, it does appear as if any economic momentum has been gained primarily through global trade, and that sector is struggling. In all, I’d say that Ireland looks more economically depressed than ambitious and not the poster child of growth.

Rebecca Wilder

crossposted with The Wilder View…Economonitors

American Enterprise Institute Economists Redux

by Mike Kimel

American Enterprise Institute Economists Redux

The other day I wrote a post about economists at the American Enterprise Institute (AEI), a prominent conservative think-tank. The post began with this paragraph from a story in the NY Times

Politicians sometimes say that lower tax rates lead to higher economic growth, which in turn leads to higher overall tax revenue. This may have been true in the early 1960s, when the top tax rate was 91 percent, but the top tax rate today is 35 percent. For decades, lower tax rates have led to lower government revenues, says Alan Viard, an economist at the American Enterprise Institute, a conservative policy group. “The Reagan tax cuts, on the whole, reduced revenue,” he explains. “The Bush tax cuts clearly reduced revenue. There is no dispute among economists about that.”

I noted that while Viard is right about tax cuts reducing federal revenue, he is wrong about “There is no dispute among economists about that.” As evidence, I pointed to a piece by his sometime co-author, Kevin Hassett and another by Glenn Hubbard, the first Chair of the Council of Economic Advisors under GW Bush. Both, I might add, are with the AEI (Hubbard as a visiting scholar). It wouldn’t take long to point to other quotes by other AEI economists disputing what Viard said is not disputable (and which, not incidentally, shouldn’t be disputable given the data.) At the AEI’s blog, James Pethokoukis responded to my post. There is no polite way to say this, so I’ll just state it as it is: his post is riddled with errors. Let me cover several of them. Of my post, Pethokoukis says this:

I have read it several times but I am not exactly sure of its Big Point other than to say nasty things about economists who either work at AEI or are affiliated with AEI. What I think author Ken Houghton is trying to say, maybe, is that supply-side economics doesn’t work.

There are three errors here, all of them concentrated in the last sentence:

1. The author of the piece is not Ken Houghton. It is Mike Kimel. As it says, “Posted by Ken Houghton” but “by Mike Kimel.”

2. The piece is not trying to say that supply-side economics doesn’t work. Alan Viard of the AEI is quoted as saying something which translates as follows: at least since Reagan took office, the tax cuts we have seen have led to lower revenues. I don’t know if Viard is willing to go further and endorse the implication of his statement about taxes and revenues, which is this: since the top marginal tax rate was at 70% before Reagan took office, and tax cuts from that 70% level and below have led to reduced revenues, if the Laffer curve is more than just a theoretical construct, unless we have a reason to believe that the last thirty two years of US history are an aberration, it turns out that we will not get an increase from revenue from a tax cut unless the top marginal tax rate is somewhere in excess of 70%. Like I said, that’s an implication of Viard’s statement.

That is not a point of the post, although in the post I did note that it seems Viard had seen data and was being honest about what the data stated. But that is only a point of the post in the sense that stating “the New York Times quoted AEI Economist Alan Viard” is a point of the post, which is to say, it isn’t a point of the post at all.

3. The point of the post is that while one AEI economist is willing to state the obvious about tax cuts, and though he may state that no economist disputes the obvious, his more prominent colleagues at the AEI do dispute what the data so obviously shows. I went further, and noted that Viard had to know that his own institute is a big part of the problem. Pethokoukis’ next sentence:

 “Supply-side economics is simply a school of economic thought that believes a) incentives matter, b) high tax rates are bad for growth, and b) inflation is fundamentally a monetary phenomenon.”

4. I’ll ignore the grammatical error toward the end of the sentence – there are enough substantive issues in the post – and merely point out: “incentives matter” is not something that defines supply-side economics any more than having two arms and two legs is a defining property of people of Swedish extraction.

I have yet to meet an economist of any stripe who doesn’t believe incentives matter, just as I cannot think of any country whose citizens don’t typically come equipped with four limbs. Its just that typically different schools of thought think incentives matter in different ways.

Let’s take Marxism as an example. I’m no Marxist, nor do I personally know any Marxists, but Marx can be summarized as: “those with capital have an incentive to exploit the workers to increase their profits, and the workers have an incentive to throw off their shackles, leading to a revolution. As long as there as a division of people due to ownership, those incentives persist. Peace, happiness, and prosperity can only exist by getting rid of those incentives, but only a revolution followed by a dictatorship of the proletariat can achieve that.” Now, whether Pethokoukis or I agree with this story (for the record, I don’t, and I’m pretty sure Pethokoukis doesn’t either), there is no question that incentives are part of the story. And I think I can show very clearly that supply siders treat certain incentives as egregiously as the Marxists do, but that’s for another post.

 “Back in the 1970s, Keynesian economists really didn’t believe any of that stuff and they dominated the economics profession.”

4a. This is kind of a continuation of the previous error, and it indicates Pethokoukis doesn’t understand the basic point that Keynes was trying to get across. I would assume that it isn’t controversy to say that Keynes General Theory, which is the basis for everything one can call “Keynesianism” can be summarized as follows: “When the economy slows, people buy less stuff, so manufacturers hire fewer people, pushing up unemployment and decreasing wages. This in turn slows the economy even more, leading to even more even pressure on employment and wages. But if the government were to start buying stuff, counteracting the reduction in demand from the private sector, it will decrease the pain companies feel, and thus decrease the layoffs and the downward pressure on wages, preventing the economy from getting worse and ending the recession sooner.”

If someone can tell that story in a way that doesn’t require both companies and workers to have incentives, I’d love to hear it. Alternatively, if someone can define Keynesian philosophy of any stripe in a way that doesn’t involve some variation of the story I just told, I’d love to hear that. FWIW, here’s Paul Krugman’s summary of the General Theory:

Stripped down, the conclusions of The General Theory might be expressed as four bullet points: • Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment • The economy’s automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully • Government policies to increase demand, by contrast, can reduce unemployment quickly • Sometimes increasing the money supply won’t be enough to persuade the private sector to spend more, and government spending must step into the breach

Even if you prefer this formulation, its hard to say there aren’t incentives in the General Theory.

5. Most Keynesians do think higher tax rates slow economic growth. In fact, back to Keyenes…. the flip side of having the government step in and spend money when the economy is slow is that, according to Keynes, when the economy is running full speed, the government should cut back on spending raise taxes. One reason for raising taxes is to pay down the debt resulting from the deficit spending when the economy was in recession, but the other is to slow the economy to prevent it from overheating, thus prolonging the expansion. For what its worth, I personally don’t think slowing the economy to prevent overheating fits what data we have, but Pethokoukis wasn’ talking about me, he was talking about Keynesian economists in the 1970s.

 “Today, pretty much everybody believes incentives matter, high taxes rates hurt growth and inflation is a monetary phenomenon. ”

6. As I noted before, you could find that incentives matter in Marx and you could find it in Keynes’ General Theory, the sources of two schools of thought to which most supply-siders will agree they are in opposition, both of which predate supply-side economics. So the fact that pretty much everyone believes it today is a meaningless statement unless you can show that Marx and Keynes were exceptions – they just happened to believe something that the supply-siders would later believe, but virtually nobody else other than Marx and Keynes held that supply-sider belief prior to the supply-siders. Otherwise, we’re once again oohing and aahing over the fact that the overwhelming majority of Swedes have two arms and two legs.

7. I’m not sure what Pethokoukis is saying when he says that everyone agrees that inflation is a monetary phenomenon, or that it is a big deal that everyone believes it now, except that he is slightly misquoting Milton Friedman. That’s all very nice, but the belief that money affects inflation goes back a very long way. Lenin, for instance, talked about debauching the currency. Here’s Keynes, straight from the General Theory:

The view that any increase in the quantity of money is inflationary (unless we mean by inflationary merely that prices are rising) is bound up with the underlying assumption of the classical theory that we are always in a condition where a reduction in the real rewards of the factors of production will lead to a curtailment in their supply.

This doesn’t sound like someone who doesn’t believe that the quantity of money is unrelated to inflation. Its merely someone who believes that the quantity of money alone isn’t the only determinant of whether there is inflation – you aren’t going to have to fear inflation as much if there’s slack in the system. To provide an obvious example of what Keynes was talking about almost eighty years ago: I’m sure Pethokoukis knows how much the money supply has increased in this country since December 2007 and how little inflation we have had in that time.

 “Supply-side economics is just economics, really. We’re all supply-siders now.”

8. Oh, really? Well, as I noted above, Keynes agreed with the three beliefs that Pethokoukis ascribes to supply siders (incentives matter, higher tax rates slow growth, and inflation is a monetary phenomenon). Yes, he had a different view of incentives than Pethokoukis, and he had some caveats on when money doesn’t affect inflation as much, but for the most part, by Pethokoukis’ definition, Keynes was a supply sider, as are most of the folks he influenced. (I note that I personally would not qualify as a supply sider by Pethokoukis’ definition, which is to say, I don’t agree with Keynes on a key piece of that definition but that’s not the subject of this post.)

 “Oh, and the Laffer Curve? Just common sense.”

9. True. But common sense is often wrong. See, the dirty little secret of modern economics as practiced in the US these days is that if you apply the Laffer curve to US data, and by that, I mean, no cherry picking. Use the entire series of US government data going back to 1929, the first year for which official data exists, estimate revenues = f(top marginal tax rate, top marginal tax rate squared) you get a quadratic function as Laffer said. The only problem is – its upside down. Results are not different from what Laffer claimed, they are absolutely and precisely the opposite. Don’t take my word for it. Do it yourself. Anyone who took an intermediate level undergraduate econometrics course and has access to a spreadsheet can do it. “

Economic historian Bruce Bartlett calls the Laffer Curve “a generally accepted analytical device … [that is] a widely discussed subject in respected academic journals.” ”

10. Show me a group of physicists discussing phlogiston and I’ll show you a group of physicists who should be extremely embarrassed. As I said above, anyone who took an intermediate level undergraduate econometrics course and has access to a spreadsheet can fit a Laffer curve. It takes a bit more effort than that to check into whether phlogiston theory has anything to it.

 “In 1980, the top U.S. marginal income tax rate was 70 percent; today it is 35 percent. Yet the share of total income taxes paid by wealthier taxpayers has risen sharply. That is powerful evidence that the United States was on the wrong side of the Laffer Curve back in 1980. ”

11. What do the first two sentences have to do with the last sentence? The Laffer curve is not about the share of taxes paid by the wealthier taxpayers. As Pethokoukis himself wrote a few paragraphs earlier:

There are two tax rates that generate zero tax revenue, 0 percent and 100 percent. And in between, there is some tax rate which generates a maximum, non-zero amount of tax revenue. As tax rates rise from 0 percent toward that level, tax revenues increase both through higher economic growth and greater tax compliance. Once beyond that inflection point, higher tax rates generate less tax revenue.

Now, powerful evidence against the Laffer curve is, in fact, is provided by Pethokoukis’ colleague Alan Viard of the AEI:

For decades, lower tax rates have led to lower government revenues, says Alan Viard, an economist at the American Enterprise Institute, a conservative policy group. “The Reagan tax cuts, on the whole, reduced revenue,” he explains. “The Bush tax cuts clearly reduced revenue. There is no dispute among economists about that.”

Well, for me this is just a hobby – I don’t get paid for this. I’ve already spent too much time at this and I have to get to work.

The Argument Against the "First Derivative Mistake" Excuse

Unless you’re really stupid, or bending over backwards to find excuses for the Obama Administration’s Geithnerian malfeasance, you should be less than impressed with Matt Yglesias’s attempt to argue that the Administration saw reason to be happy with overall employment (link to Brad DeLong).

If you’re Matt Yglesias, you should be even less impressed with your (own) argument.

Because Matt Yglesias was paying attention in 2010. He was paying much more attention to Barack Obama’s speeches than I was, so he would have heard the 27 January 2010 State of the Union, when Barack Obama said:

[O]ur efforts to prevent a second depression have added another $1 trillion to our national debt. That, too, is a fact.

I’m absolutely convinced that was the right thing to do. But families across the country are tightening their belts and making tough decisions. The federal government should do the same. (Applause.) So tonight, I’m proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year.

Starting in 2011, we are prepared to freeze government spending for three years. (Applause.) Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will. (Applause.) [emphases mine; laugh track in original]

And Matt Yglesias, who was paying attention then and has a memory now, would have known that “freezing government spending in 2011” means starting 1 October 2010 (when FY 2011 starts), which means that departments have to start planning and cutting…well, basically when the words leave Obama’s mouth.

And Matt Yglesias would have known that transfer payments such as Unemployment Insurance, Temporary Assistance for Needy Families, the Home Energy Assistance Program, and other programs that (at the least) enable “discretionary” spending on things such as food, clothing, and medicine are not on the list of programs that will be exempted from funding cuts. So—even ignoring any moral considerations about letting people freeze to death or starve—there’s a cut in consumption (and therefore GDP) coming. Which will impact employment.

And Matt Yglesias would have known that freezing Federal spending—which is what Obama really means, since he doesn’t control the States’s spending directly—means that the States that are at best just starting to recover, and that have to balance their budget somehow, and only did it for the then-current fiscal year with the help of a lot of stimulus that won’t be coming from a frozen government budget. So there will be cuts in civil servants, and more cuts in consumption.

And Matt Yglesias would have known that freezing the Federal budget in the midst of a slow recovery (because even Matt’s first graphic doesn’t come close to the stable-unemployment rate of 110-150,000 new jobs a month at the time of the SotU, and only approaches it later because it includes temporary census hiring) means that there will have to be layoffs at the Federal level as well, even if there is no one (contrary to economic theory) who leaves for the private sector.

And Matt Yglesias—who isn’t as dumb as his post makes him seem—would know that an Administration that says something that stupid in 2010 isn’t looking at his second (more clearly understandable) graphic, or even his first (census-enhanced) graphic, but rather so mythological construct where all those government workers and increasingly-impoverished unemployed people magically Create Jobs.

And Matt Yglesias—not to mention Brad DeLong—would not be at all surprised when the result of those early 2010 policies came home to roost:

Indeed, the reaction might well be that the recovery went even better than should have been expected, and to wonder why.

And Matt Yglesias would, instead of making excuses for them, wonder aloud why any capable economist (or even one of the Administration’s policy guru) would have been stupid enough to take the first chart he presented seriously as a roadmap, since the Administration changed the territory—for the worst, from an employment perspective—from the previous model. He would be asking if Austan Goolsbee—who is smarter than both Matt and myself, and possibly the two of us combined—was just sleeping through the entire Administration.

But Matt Yglesias didn’t do any of those things. Why, oh why, can’t we have a better press corps?(tm, Brad DeLong)

Graph That Explains Everything About Amity Shlaes

by Mike Kimel

Thanks to Linda Beale, I headed over here:

The George W. Bush Institute announced today that Amity Shlaes has been named director of the 4% Growth Project, a key part of the Institute’s focus on economic growth. Miss Shlaes will open the project’s office in New York. The aim of the project is to illuminate ideas and reforms that can yield faster, higher quality growth in the United States, and to underscore the importance of growth in America’s future. Part of that work involves finding ways to make growth and economics generally accessible to more Americans, especially younger Americans. The program will conduct and sponsor research on all aspects of economic growth, host conferences, as well as partner with other institutions in such endeavors.

The following graph, I think, illustrates you need to know about Amity Shlaes:

OK. I lied. The graph is actually missing something. See, we only have official data going back to 1929. And the Great Depression began very, very early in Hoover’s term. And Hoover had been a cabinet secretary under Coolidge, and ran for office under a platform which essentially called for continuing Coolidge’s policies. And Shlaes’ forthcoming book is in praise of Calvin Coolidge. It should be noted that the economy was in recession during over 38% of the months in which Coolidge took office, which makes much of the Coolidge era a dry run (so to speak) for the monster that would come in 1929.

Put another way… Shlaes is part of a movement to praise policies responsible for a lousy economy culminating in the Great Depression (i.e., those of Coolidge and Hoover). Shlaes is also part of a movement to praise the policies responsible for a lousy economy culminating in the start of the Great Recession and the mess we’re in today. (Yes, the Great Recession started in 2007, and no, Obama hasn’t made any substantial changes on taxes or regulation from the way GW Bush ran the country.) Conversely, Shlaes is a well-known critic of the policies that produced the fastest period of peace time economic growth this country has seen.

To me this feature of economics is kind of odd. For some reason, policies that have failed spectacularly over and over continue to have adherents. Policies that have worked spectacularly have critics. Debating the merits of a cavalry charge into the teeth of an armored column was barely excusable in August of 1939, but at least that debate was put to a rest by the German blitzkrieg. Its been generations since anyone argued that horsemen can go toe to toe with tanks.

Which leads me to a hypothetical. Say we lived in a parallel universe where Shlaes was a quisling, a real villain whose goal was to harm this country as much as she could by convincing the nation to commit economic suicide. How would the graph above and the two paragraphs that followed it look any different?

About That, er, Monetary Expansion…

Brad DeLong has a spat with Scott Sumner:

The IS-LM model led economic historians to argue money was easy in 1929-30, because rates fell sharply. It led modern Keynesians to assume that money was easy in 2008, because rates fell sharply…

Well, I would say that not just “modern Keynesians” but a lot of people believed that monetary policy was expansionary in 2008.

They believed so not just because (safe) nominal (and real) interest rates were falling, but because the money supply was expanding. Indeed, since 2007 the Federal Reserve has tripled the monetary base

But there remains a reason I suggest that cutting off Tim Geithner’s (and/or Ben Bernanke’s) private parts, stuffing them into his mouth, and perp-walking him publicly down Dewy Square* would be a good re-election move for the Obama Administration, and it comes back to basic economics. Specifically, Brad DeLong’s favorite monetary equation


Now, most of the time, we derive V—Velocity. We kinda sorta hafta. The velocity of money is not something that you really observe directly; to solve the equation for V(i), we have to know Y, P, and M.

But then we’re making assumptions about them. Two of them are probably reasonable:

Y = GDP (or GNP if you add in XM, but let’s not). We shorthand this as “aggregate output.” Even if we weren’t pretending it’s constant in the short-term, we can fairly well define this and hold to the definition. GDP=GDP, as it were.

P = Price Level. This is slightly more difficult conceptually, because we aren’t going to include everything. But if we assume (short-term) that the “market basket” is constant (or at least fungible**), we can come up with a representative index level and just treat this as “inflation.”

The third, however, is more problematic:

M is the Base Money Supply, which is circulating.

Recall that V = Velocity, or, the number of times in a year that a dollar is spent, a definition that led to Keynes’s observation that V isn’t so much a constant (pace Fisher) as dependent on interest rates—V(i). This doesn’t (or, more accurately, shouldn’t) change much in the short-term, even at the zero-bound.

But “velocity” assumes money is circulating, which why it is multiplied by the Monetary Base from the start. If the monetary base has all the mobility of an overBotoxed actor’s face, we’re going to have a problem. I would call the following graphic “Where’s the Real Increase in the Monetary Base?”

The above graphic is Ben Bernanke’s fault. And even Brad DeLong knows this. The proof below the fold.

Or, at least, he strongly suggests he does, citing WSJ columnist David Wessel:

The Fed is not out of ammo, the economists at the Bank Credit Analyst insist…

The three:

Target a higher inflation rate or pre-specified level for the consumer price index or nominal gross domestic product. Problem: “could undermine the Fed’s long-standing commitment to price stability.”

Stimulate bank lending by putting a tax on excess reserves, hoping that banks will the lend out the money if the have to pay borrowers to take the loans. Problem: “could lead to the collapse of money market funds and the disintermediation of the financial system.”

Buy corporate debt, equities, real estate or foreign currency. Problem: Could require an act of Congress. “Given that the U.S. economy remains stuck in a liquidity trap,” Berezin concludes, “fiscal policy would be the most straightforward way to stimulate….However, the likelihood that the U.S. will receive major fiscal stimulus anytime soon is close to zero.”

I’m not sanguine about the latter. Even absent economic issues (which are minimal in the current environment), the political ones are problematic.*** That it makes more sense than telling people to put their money into a 401(k) that consists 90% of company stock is a low bar to jump. On the other hand, buying Yuan until it has to appreciate is worth exploring.

The first has been getting traction for years. And I admit I can’t decide who was stupider: the people who set a 2% target on no evidence (sorry, David, I held to this even after reading your cites) or the people who decided a “2% target” meant “<=." It now has enough traction that it will get out of the avalanche about the time the snow melts. So that leaves the second one. Which brings us back to the Monetary Equation problem. Recall that the definition of Velocity is "the number of times in a year that a dollar is spent." I buy something at the Dollar Store, they use that dollar to buy more products and pay employees, the suppliers and employees buy more supplies and other products, respectively, etc.**** So Brad DeLong ("I see no risks in attempting any of these three--and great risks in continuing to dither") agrees with Peter Berezin of Bank Credit Analyst (and me) that we don't want banks holding Excess Reserves as a matter of monetary policy at the zero bound. Fundamental principle of economics: you want to tax things you wish to discourage. You want to subsidize things you wish to encourage. As the Rabbi once said, "All else is commentary." So what did the Federal Reserve do in the face of a desperate attempt from the Fed to stimulate the Base Money Supply?

The Financial Services Regulatory Relief Act of 2006 originally authorized the Federal Reserve to begin paying interest on balances held by or on behalf of depository institutions beginning October 1, 2011. The recently enacted Emergency Economic Stabilization Act of 2008 accelerated the effective date to October 1, 2008.

Employing the accelerated authority, the Board has approved a rule to amend its Regulation D (Reserve Requirements of Depository Institutions) to direct the Federal Reserve Banks to pay interest on required reserve balances (that is, balances held to satisfy depository institutions’ reserve requirements) and on excess balances (balances held in excess of required reserve balances and clearing balances).

this lead to something that will surprise no economist of any caliber, let alone a Professor at Princeton:

By the time of the stimulus, roughly that amount had been taken out of circulation as the change in Excess Reserves. Even if every cent had been well-allocated, it was already out of circulation.

Ben Bernanke giveth, but Ben Bernanke taketh away even more, in spades.

What Monetary Stimulus?

*Again, I don’t encourage this action. But if you think I can’t create or find a suggestion for each of the Occupy locations, you haven’t read and seen enough Jacobean drama.

**Whether we replace my wife’s three-year old mobile with either a “free” Droid or a “free” iPhone 3GS probably doesn’t have a significant effect. Economists pretend that the “steak-chicken” model is similar.

***Short version: You think the tempest-in-a-teapot that is Solyndra is getting discussion? Try that times ten when three or four REITs and a few companies go under. (Amazingly, those who complain about the “low” return on Government securities also loudly complain when the Government invests in non-risk-free securities.)

****It is left as a side-note that increasing the Velocity of Money is yet another way to reduce tax rates, all else equal. It is also left as a side-note that people who talk about “double taxation” of (voluntarily disbursed) dividends are economic ignoramuses, and that there are many economists who talk in that manner in no way invalidates the first half of this sentence.

PSA: Steve Keen at the Roosevelt in NYC tonight at 5:00/6:00

Talk is called “Neat, Plausible, and Wrong: the Deluded Discipline of Economics.”

I have to quibble with the “plausible” portion: there is no possible way to rationalize contemporary Microeconomics with any reasonable conceit that the Macroeconomics produced are “first-best” or anything similar.*

I doubt I’ll be there at 5:00, but certainly by 6:00. Hope to see some of you there.

Any questions for Professor Keen can be emailed to me or put in comments.

*This may be the root of my disagreement with Brad DeLong, who learned Macro and Micro when it was still possible—barely—to envision a GUT of Economics, even in a (weak form, as it were) Arrow-Debreu world. In the past thirty years, the strange delusion that Arrow-Debreu actually reflects the world has come to dominant Micro—with the rather predictable adverse consequence that Macro has to be more-than-the-sum-of-the-parts—i.e., include a positive social aspect—to be the best of all posible current worlds. But a positive social aspect is not part of the NeoKeynesian** cant, so you end up, effectively, declaring (for instance) that Gary Becker is wrong and discrimination is a beneficial business practice.

**As I have noted before, in economics the phrase “neo” is added to the front of a word if you are putting forth a belief set that is diametrically opposed to what came before: neoClassical and neoKeynesian are the most obvious examples of this.