I have been remiss in posting links to videos, talks, and podcasts, for those of you who enjoy them. Perhaps you have a long boring drive this weekend and NPR is driving you nuts.
1. An interview on MMT (Modern Monetary Theory) with my good friend Luigi Zingales from the University of Chicago Booth School, in the Capitalisn't series, following up on my review of Stephanie Kelton's book. Go to link for other formats or if embed code below doesn't work. Apple podcast. Spotify.
2. A discussion for the Manhattan Institute, Exploding Public Debt: Consequences For Fixed Income Markets And Future Fiscal Policy together with Raghu Rajan (Chicago Booth) and Simon Johnson (MIT), moderated by Manhattan's Allson Scrager. Even if you're tired of my views on the subject, my co-panelists had fascinating things to say
3. The Curse of Cross Subsidies. This is part of the Hoover Policy-Ed effort, short highly produced videos that try to explain one key idea well. The idea here: Taxing and spending is not as bad as mandated cross subsidies. Our government forces you and me to overpay for health care, to subsidize others. The cross-subsidy cannot withstand competition. This is a key original sin of our dysfunctional health care and insurance system. We put a lot of work into saying this even more clearly in the video, which is also very professionally produced. Embedded here, but the top link has readings and more materials, worth a look, as is the whole series. If you're teaching intro economics this might be useful.
4. Goodfellows (link to the series, including summaries and other formats).
- Sept 29 we talk with John Yoo about law and the possible tumult in the upcoming election, especially if it is close. John has a deep grasp of history and law, and seems to be able to quote the Federalist Papers from memory. An informative episode. Direct link.
- Sept 23 we talk with HR McMaster about his new Book Battlegrounds. He didn't get off easy just because he's a buddy. A great tour of foreign policy; Russia, China, the Middle East, what America does right, mistakes, and outlook for the future. Direct Link
If you want a sense of what kind of straight-up guy McMaster is, read his preface:
This is not the book that most people wanted me to write. Friends, agents, editors, and even family, asked me to write a tell-all about my experience in the White House to confirm their opinions of President Donald Trump. Those who supported the president would have liked me to depict him as an unconventional leader who, despite his brash style, made decisions and implemented policies that advanced American interests. Those who opposed the president wanted an account to confirm thei judgment that he was a bigoted narcissist unfit for office. And they wanted me to write it immediately, so that the book might influence the outcome of the 2020 presidential election. Although writing such a book might be lucrative, I did not believe that it would be useful or satisfactory for most readers. The polarization of America’s polity and that of other free and open societies is destructive, and I wanted to write a book that might help transcend the vitriol of partisan political discourse and help readers understand better the most significant challenges to security, freedom, and prosperity. I hoped that improved understanding might inspire the meaningful discussion and resolute action necessary to overcome those challenges.
5. Last but not least, the most recent Grumpy Economist podcast.
This one is on the future of cities. I think cities will bounce back. They always have, from worse than this. No, zoom does not change everything -- as the telephone, fax machine, fedex, email did not change everything. But some cities will spiral down and some cities will prosper. Cities are built on agglomerations, and once they start to spiral down it's hard to reverse.
I realize I'm not as good at this as I should be, and I can announce that I've signed up Ed Glaser to come talk to the grumpy podcast about the future of cities next week. The speculations will be much better informed.
I enjoyed number 5. Like you I do believe that the everyone-will-be-remote future is overblown. You came so close to cheerleading for AOC. Come on, give her her props for stopping the Amazon give away. You were almost there before you made it backhanded.
ReplyDeleteRecommended years ago to someone with contact to Mnuchin that we issue very long term debt in max. amounts. Response: Not a deep enough market past 30 year term, so they either do not know there biz or they lie
ReplyDeleteI've heard the same answer. If you don't offer it, how do you know? Of course the market is not deep. Supply = 0. Nothing stops the treasury from issuing $1000 of a bond and let the market develop. Having explored this with a number of people at treasury, my reading is they know what bonds the big dealer banks like to buy and sell and turn over, charging a bid ask spread. They have not begun to think about managing interest rate risk to the US fiscal position, nor what kind of bonds underlying investors want. Bonds that do not roll over, denying dealer banks the spread each time, are not appetizing to dealer banks, or to ex-bankers at the Treasury.
DeletePlease understand the way that Clinton and Bob Rubin were able to balance the federal budget. A lot of the budget balance was achieved by reducing the term structure of the federal debt (in essence paying off long term debt and rolling it over to short term lower interest rate debt). You have to remember that a lot of the long term debt that was coming due in 1992-2000 was issued in the late 60s and throughout the 70's with interest rates in the 8-20% range.
DeleteBorrowing long term just delays the inevitable (as Clinton and Bush were witness to).
John,
DeleteIt's more complicated than that. With long term debt there is prepayment risk. Do you realize that a lot of the budget balance that Clinton / Rubin achieved came about because the long term bonds (sold in the 1970s / 1980s at interest rates between 8 and 20% ) were called in before they had reached maturity?
See the following graph from the St. Louis Fed site comparing interest payments to total receipts:
https://fred.stlouisfed.org/series/A091RC1Q027SBEA#0
This value (federal interest payments / federal receipts) peaked at 27-28% between 1985 and 1990.
And that is a big part of the reason why dealer banks (and the institutions that they represent) are reluctant to buy long term government debt. Fooled my once, shame on you. Fooled me twice, shame on me.
"They (the Treasury) have not begun to think about managing interest rate risk to the US fiscal position..."
I am quite sure they have begun thinking about managing interest cost risk - and that's the key term (not interest rate). If the federal government only had a few thousand dollars of debt, interest rates would have little effect on the government's fiscal position.
The way to manage interest cost exposure isn't with longer term debt that pays a higher interest rate. The way to manage interest cost is to reduce total debt.
US debt is no longer callable. And they know how to price a call option anyway. And they can sell non-callable debt. Sure reducing the total would be nice, but we should also talk about realistic second best options. All financial crises come from short term debt.
DeleteJohn,
Delete"Sure reducing the total would be nice..."
??? Nice ??? - What does that even mean? It's quite simple really. To reduce government debt, it does one or more of the following:
1. Raise taxes (which Republicans hate)
2. Cut spending (which Democrates hate)
3. Sell equity
"All financial crises come from short term debt."
Incorrect from a fiscal perspective. If total interest expense exceeds total tax revenue - then the bond market crisis happens. And it doesn't matter what the term structure of the debt looks like when that happens (long term or short term).
Please understand what a Ponzi scheme is. When bondholders are making the interest payments to themselves (without sufficient taxpayer support), the bond markets collapse. The federal government can roll over principle all it likes. The interest payments (from taxpayers) are what keep the ball rolling.
That is why Blanchard and Summers keep referring to economic growth rate as supporting the payments on bonds (rather than tax revenue) - don't want to start a panic.
there is a thorough lack of thinking re liability management at Treasury and hard to see how that is going to change. I did ask why is it we have seen other countries extend their liability schedules and yet we do not? Maybe too many economists and not finance types at Treasury addressing the issue!!!
DeleteAnonymous,
DeleteThe list of recent past and present Treasury Secretaries should tell you all you need to know:
Steve Mnuchin - Former Goldman Sachs investment banker
Jacob Lew - Former Citigroup investment banker
Timothy Geithner - Former NY Fed president
Hank Paulson - Former Goldman Sachs investment banker
Hint,
DeleteBob Rubin (and Alan Greenspan) thought the best thing for commercial banking / investment banking / and insurance industry was to lump all of these different types of banks into one umbrella so that each bank would be able to diversify it's risks.
Instead, all that has happened is that economic risk has been concentrated - all asset classes (bonds, stocks, housing, currency) have become highly correlated. That is EXTREMELY dangerous for an economy.
The problem is none of the supposedly smart people at either the FOMC or the Treasury have figured this out.
And that is why the Treasury must sell securities (equity) on demand (rather than as a consequence of deficits) that is inversely correlated to economic activity (output gap widens, price of Treasury equity falls - output gap contracts, price of Treasury equity rises).
With respect to (1) on MMT, you may be interested in the working paper on MMT's job guarantee proposal linked below. Adapting a Barro-Gordon model of time inconsistency, we show that the JG program would lead be inflationary, even in the best case with commitment. This is one of the few attempts to shove MMT into a neoclassical framework, along with Rondina. We also compare the price stabilization aspect of the MMT JG program with a nominal wage target conducted by the central bank.
ReplyDeletehttps://www.briancalbrecht.com/Mejia_Albrecht_MMT.pdf
John, I love you blog.
ReplyDeleteCould you change your emails formatting? It is a once off effort, which might help.
Current emails have a uniform subject line "The Grumpy Economist"
Optimally, the headline should be like "TGE blog post current title" or something like this.
Most bloggers do it this way. I am sure the setting is available
For example this. https://wpblogsites.com/how-to/how-to-customize-the-subject-of-your-feedburner-emails/
Not sure if this one helps with whatever you are using. But there has to be a way to automatise it
Cheers