tag:blogger.com,1999:blog-582368152716771238.post5284163148955048073..comments2024-03-28T14:41:03.793-05:00Comments on The Grumpy Economist: Summers on StagnationJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger39125tag:blogger.com,1999:blog-582368152716771238.post-11692885601795086042014-06-28T20:51:44.352-05:002014-06-28T20:51:44.352-05:00"Ponder the fact that it used to require tens..."Ponder the fact that it used to require tens of millions of dollars to start a significant new venture, and significant new ventures today are seeded with hundreds of thousands of dollars."<br /><br />This is actually a good thing, right? Financial capital is a scarce resource, so if new ventures require less capital, then new venture formation will be less constrained, which should be a positive for economic growth, right? The effect would be similar to a case where new technology allows us to produce more output with a fixed amount of energy. Understood that equilibrium interest rates will be lower, just as new energy-efficient technology will lead to lower energy prices, but the impact on growth should be positive, correct?BCnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-32147617636479288842014-06-27T02:28:35.336-05:002014-06-27T02:28:35.336-05:00For big recession, I would actually like to see fu...For big recession, I would actually like to see full Keynesian experiment. Pick a sector. Many crises are hard on construction sector (when contracting, businesses do not need new buildings, people do not buy new houses, nobody needs new infrastructure), so there should be lots of unemployed resources. Government should create, quickly (inside 3, at most 6 months) enough construction projects to keep construction industry fully employed for at least a year, maybe two. Government should run as high deficits as needed (no contraction elsewhere to finance this). Possible outcomes:<br />(1) Keynes was right, and full hysteresis multiplier exists (around 5) - excellent, economy is booming again, or will boom shortly<br />(2) Keynes was right, but with lower multiplier (around 1.5) - also great, recession can be dealt with quickly, spending from construction sector has propped up other sectors<br />(3) Utter fail, lots of money spent for no effect on GDP - actually not very bad result - because of the failure and all the new debt, USD would devalue, probably even against China and India; there would be reorientation on the markets (US products would replace imported ones), exports would be much cheaper, and some industries would even return to US - economy would boom soon<br />(4) Middling results, economy would have some positive results while the program is going, but that would fade after the construction cycle is finished, without lasting effect on the recession and economy - really bad result, basically prolonging the recession, while mitigating early impact<br /><br />As long as cost of (4) is not prohibitively expensive compared to the loss in the economy as a result of the current crisis, that would be worthwhile experiment. It can hardly be worse than the response to this crisis.<br /><br />(Additionally, if Keynes was right, government would not need enough worthwhile projects to fully employ construction industry - even if return of every single project individually is below 1, employment of people who would otherwise be unemployed and resources that would otherwise be idle would generate taxes, additional demand, jump-start other sectors and industries, generate additional taxes and demand to the point where private sector would be able to create enough demand for construction industry as government projects end. At that point any actual value received from those projects would be bonus.)<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-14919980196005572622014-06-27T02:27:27.000-05:002014-06-27T02:27:27.000-05:00Extended unemployment benefits and disability bene...Extended unemployment benefits and disability benefits cannot influence the number of workers in the economy where number of unemployed is more than order of magnitude greater than number of working places. The problem was number of available jobs, not how much incentive people have to seek new jobs. Even if you believe that 50% of people on benefits seek less (way, way, too high percentage), that still leaves at least 5 unemployed for every new job. Meaning, at least 80% of those willing to do anything for a job still could not find one, instead of 90%.<br />Unemployment benefits are not something you live on, it's something to help you not to starve while trying to find a new job. If economy is close to the full employment, then you can say that small amount of people willing to live on dole may matter. As long as unemployment is high, economy won't notice them.<br />Also, if you look at the GDP and unemployment figures, job recovery has been much slower than GDP recovery after recessions at least since 70s.<br />When benefits run out, you see reduction in unemployment rate because some people simply lose hope and stop looking for job. That is structural damage to the economy.<br />Another structural damage to the economy are long-term unemployed. Analysis seem to say that people who have been unemployed more than a year have additional trouble finding jobs, because employers think there is something wrong with them (even if the only "wrong" thing was that 10M people were downsized when only 1M jobs total could be found throughout a year). When they find one, some have difficult time returning to work habits.<br />Look at employment/population ratio for men 25-54. It dropped almost 7%, and it has now recovered around 2%. It's hard to imagine that that many men in prime will stop working because of (meager) benefits.<br /><br />When crisis strikes, economy will, sooner or later, recover. The questions are: how soon will it recover, how much permanent damage will be left, and how severe will the impact be on the people.<br />Without any government intervention, impact on those with lower income (those who can't build themselves emergency fund) can be disastrous. Government should ensure that they have some basic needs (food, place to sleep), if nothing else, to keep them alive and capable of rejoining workforce later. As for the economy...?<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-44990869499564449632014-06-26T18:01:05.840-05:002014-06-26T18:01:05.840-05:00Juan,
From the link:
Page 27: "We can combi...Juan,<br /><br />From the link:<br /><br />Page 27: "We can combine (7) and (38) to obtain a no arbitrage condition linking the capital rental rate to the real interest rate"<br /><br />No you can't for several reasons. Most notably market segmentation may allow for arbitrage opportunity.<br /><br />For instance the U. S. central bank is limited by law as follows:<br /><br />http://www.federalreserve.gov/aboutthefed/section14.htm<br /><br />"Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to the principal and interest may be bought and sold without regard to maturities but only in the open market."<br /><br />As such, the capital rental rate may exceed the real interest rate precisely because the central bank is limited in what it may purchase.<br /><br />Page 27: "Relative to our earlier derivation of loan supply in (10), we see that the last term on the right hand side is new - the presence of capital will reduce the supply of savings available in the bond market. However, as before there is no reason for the two curves, Lst and Ldt , to intersect at a positive real interest rate."<br /><br />They will if you allow for an arbitrage condition between the rental rate on capital and the real interest rate.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-24675228644926964452014-06-26T16:15:25.759-05:002014-06-26T16:15:25.759-05:00To Neal Reynolds,
Thanks for the shout out.
-- -...To Neal Reynolds,<br /><br />Thanks for the shout out.<br /><br />-- --<br />To Kaleberg,<br /><br />Why do you think that? A citation to an analysis of observed data would be interesting. What do you literally mean by "the money gets multiplied"?<br />Andrew_M_Garlandhttps://www.blogger.com/profile/02855052302054611917noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-56739402822013821452014-06-26T10:34:31.211-05:002014-06-26T10:34:31.211-05:00Let me clarify. It's *potential* GDP that fell...Let me clarify. It's *potential* GDP that fell in 2009 (and after, I suppose, as Obama implemented more policies) because of Obama. Actual GDP had already fallen, but if potential GDP had not fallen, actual GDP would have bounced back. Initial reduced employment was because of the recession, but then extended unemployment benefits, means-tested mortgage relief, the prospect of Obamacare, easy disability benefits etc. prevented employment from increasing as much as it woudl have ordinarily. Structural damage like that to an economy, however, is a one-time shock, and needn't be a drag on growth,even though the annual losses it causes persist forever. Eric Rasmusenhttps://www.blogger.com/profile/01609599580545475695noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-84160471755588680672014-06-26T08:27:50.880-05:002014-06-26T08:27:50.880-05:00Kaleberg,
See:
http://en.wikipedia.org/wiki/Cons...Kaleberg,<br /><br />See:<br /><br />http://en.wikipedia.org/wiki/Consols<br /><br />They started out at 3%, and the interest rate was reduced over time. Also, British consols were coupon securities that make quarterly interest payments. I was referring to bonds such as:<br /><br />http://en.wikipedia.org/wiki/Zero-coupon_bondFRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-50879336801106376352014-06-26T04:17:18.114-05:002014-06-26T04:17:18.114-05:00Great post as usual. On your statement "while...Great post as usual. On your statement "while Summers' discussion points to low interest rates, it is awfully hard to get any sensible economic model that has a sharply negative long run real rate", I was at an LSE seminar a couple of days ago where Gautti Eggertsson presented a paper trying to do just that:<br />http://www.econ.brown.edu/fac/gauti_eggertsson/papers/Eggertsson_Mehrotra.pdf<br /><br />I wonder if you have any comments on that model.Juan ADnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-29750962759760888912014-06-26T03:10:41.158-05:002014-06-26T03:10:41.158-05:00Most of the loss is between 2008Q1 and 2009 Q1. Ob...Most of the loss is between 2008Q1 and 2009 Q1. Obama took the office in 2009 Q1. There is no way he could do the damage. If the loss is the result of wrong policies, it could only be pre-Obama policies. Effects from Obama's policies would be visible late 2009 at earliest, and 2010 more likely, the time of recovery. Although, growth is constantly lower than the prediction of 2007 potential.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-36092484882467104602014-06-26T02:54:51.121-05:002014-06-26T02:54:51.121-05:00But, they are not people who want free checks, the...But, they are not people who want free checks, they are really disabled people who found themselves in a situation where they had no other way out. Reducing their right to disability without creating more jobs would do nothing for economy and would increase their suffering. And creating enough jobs so that they can continue working would make any cuts in disability rights unnecessary, because they have shown that the prefer to work.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-60469235972098161342014-06-26T02:20:39.744-05:002014-06-26T02:20:39.744-05:00"Transportation businesses can never make mon..."Transportation businesses can never make money over the long haul"<br />Who said that? Moses? <br />Airports can perfectly be profitable and financed with fees paid by the passengers. It works the same way than a shoe store. If you don't agree then you don't agree with free market capitalism and the price system to allocate resources.<br />Also, why should a poor person who never uses airplanes pay for Kennedy airport expansion?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-85257390680974095232014-06-25T22:52:42.768-05:002014-06-25T22:52:42.768-05:00England used to sell consuls, debt with no due dat...England used to sell consuls, debt with no due date. I think they paid 3%, or at least that's what Thackeray said in Becky Sharpe. If nothing else, Thackeray knew his money. Kaleberghttps://www.blogger.com/profile/05283840743310507878noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-58001228858547546412014-06-25T22:50:54.552-05:002014-06-25T22:50:54.552-05:00The problem with Garland et al is that Keynesian m...The problem with Garland et al is that Keynesian multiplier still seems to work like a honey. Economists can jump up and down and argue that it doesn't exist, but every time the government pisses off money on poor or middle class people, the money winds up getting multiplied. When they give it to billionaires, they might as well have burned it, except that the fire at least that could have heated a room or something.Kaleberghttps://www.blogger.com/profile/05283840743310507878noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-43392098373096856742014-06-25T22:47:34.855-05:002014-06-25T22:47:34.855-05:00Yes, extremely high tax rates would help. The gove...Yes, extremely high tax rates would help. The government could then hire lots of people to dig ditches and fill them in, or perhaps to update their Facebook pages every five minutes. These people would then have money and that would encourage businesses to invest in order to provide goods and services that these people might give them money for. It has worked in the past.<br /><br />In the 1950s and 1960s business magazines used to have pages of income statistics broken down regionally. Businesses would then look for places where people had money and invest accordingly. The businesses got money. The businessmen got rich. The people got the stuff they spent their money on. Then came the tax cuts and the assault on "wasteful" government spending and businessmen whining and whining. If people had more money I'd invest in an earplug factory.Kaleberghttps://www.blogger.com/profile/05283840743310507878noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-52219072309449052892014-06-25T22:42:21.240-05:002014-06-25T22:42:21.240-05:00"And why on earth do airports need to be fina..."And why on earth do airports need to be financed with taxes?"<br /><br />Perhaps because there is no way any business would ever invest in an airport without huge government guarantees and subsidies. Transportation businesses can never make money over the long haul and airports are a system cost that will never be profitable for any length of time. If we want transportation, we need government spending and taxes to fund it. You can go back 5,000 years, but that's the story from rent-a-mule, to the post-chaise, to the railroads, to the airlines, to the Star Trek Express to Rigel V.<br />Kaleberghttps://www.blogger.com/profile/05283840743310507878noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-37335265354641878472014-06-25T22:20:21.831-05:002014-06-25T22:20:21.831-05:00You say that "people with skills.. expensive....You say that "people with skills.. expensive." But isn't the high unemployment rate for the unskilled an indication that all labor is expensive? Low skilled workers are expensive because their value relative to the costs (both direct and indirect) of hiring them is too high. The price at which they would be valuable would not only be below the minimum wage but would require removing some of the regulations on labor, on health care, hiring and firing, etc. Absent such changes, their true costs are too high.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-61639615479829888722014-06-25T21:05:01.346-05:002014-06-25T21:05:01.346-05:00Changes in tax policy won't address the fact t...Changes in tax policy won't address the fact that a little money spent buying favors from the government has a much better ROI than a lot of money spent on capex.JB McMunnhttps://www.blogger.com/profile/15468282698533043544noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-86483107488976166952014-06-25T21:00:54.264-05:002014-06-25T21:00:54.264-05:00If only we all lived on Wall Street instead of Mai...If only we all lived on Wall Street instead of Main Street.<br /><br />This reminds me of William Dudley's infamous "Let them eat iPads" speech. I think you can expect a job offer from the Department of Hedonic Adjustments pretty soon. <br /><br />Earnings are easily manipulated numbers. You borrow at repressed rates, buy back shares and voila! Headline EPS goes up. But this borrowing does nothing to add production capacity or start new projects. It doesn't add new jobs. It’s money spent for the sole purpose of manipulating a number. To make matters worse, it's done by buying back shares while they are making all-time highs, which from a business POV is insane.<br /><br />Then they play the "non-GAAP/pro forma earnings/one time write off" game and hype future earnings. And then those earnings beat expectations because as earnings season approaches the estimates start falling. <br /><br />Ever wonder how S&P 500 revenue growth from March 2009 to March 2014 averaged just 3.2% while earnings growth averaged 16.2? That's a pretty amazing jump in efficiency! And some of it really was increased efficiency, like getting more work out of the employees who survived the layoffs.<br /><br />You can only play that game for so long. The math always rises to the surface, like a bloated corpse in a murder mystery.<br /><br />JB McMunnhttps://www.blogger.com/profile/15468282698533043544noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-77842854170421957142014-06-25T20:04:23.469-05:002014-06-25T20:04:23.469-05:00If a government runs a 5% deficit and the term pre...If a government runs a 5% deficit and the term premium is 0.25% added interest for every 1% increase in duration then the government can extend duration by:<br /><br />5% + 0.25% x ( X / 1% ) = X<br /><br />X = 6.66%<br /><br />And pay the same amount of annual interest. In essence the government is stretching out the interest payments over more years.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-17745696119140418092014-06-25T17:54:51.241-05:002014-06-25T17:54:51.241-05:00Technological improvements dont reduce GDP
Read th...Technological improvements dont reduce GDP<br />Read the fallacy of the broken window by Bastiat, you can easily find it online<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-57562889958638993052014-06-25T17:37:18.697-05:002014-06-25T17:37:18.697-05:00"r>g means there is a government budget co..."r>g means there is a government budget constraint"<br /><br />Not really. The burden of government debt is the interest only. A government can roll over the principle of it's debt indefinitely - it never "has to" be repaid. The interest is paid from tax revenue (assuming no Ponzi finance).<br /><br />Assume that tax revenue is a constant percentage of nominal GDP. And so at a glance it would appear that annual nominal GDP must be greater than the average interest rate times the total debt outstanding otherwise interest payments as a percentage of tax revenue grow toward and eventually exceed 100%.<br /><br />BUT, the underlying assumption is that the federal government makes regular cash interest payments on its debt (coupon bonds). This is not the case with some forms of government debt. In some instances, the federal government sells bonds where the interest accrues - interest and principle are returned when the bond reaches maturity. And so a government when faced with chronic budget deficits can switch to more accrual bonds and lengthen maturity.<br /><br />What is the interest rate on 100 year government debt? How about 500 year?<br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-69222922581000770832014-06-25T15:37:50.760-05:002014-06-25T15:37:50.760-05:00"While the press talks about recovery, macroe..."While the press talks about recovery, macroeconomists look at output growth and employment and it still looks pretty dismal."<br /><br /> Looking at the GDP growth graph, I don't see that. Growth is fine. The problem is that we never got the bounceback special growth that usually happens after recessions. Or, phrased differently, potential GDP fell in 2009, we recovered in 2010, and since then have grown at a normal rate. My interpretation is that Obama Administration policies created a huge one-time loss for the economy but did not affect the rate of growth. A smaller fraction of the population is employed than in the old regime, and that's not going to change, but growth will be at a normal rate. Eric Rasmusenhttps://www.blogger.com/profile/01609599580545475695noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-66802936122688043532014-06-25T14:56:26.649-05:002014-06-25T14:56:26.649-05:00But the prsent value of primary surpluses still eq...But the prsent value of primary surpluses still equals the outstainding debt in that circumstance. That also is simple math. r>g means there is a government budget constraint. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-73570479972265384302014-06-25T14:51:24.737-05:002014-06-25T14:51:24.737-05:00It is not a fact say that government debt must be ...It is not a fact say that government debt must be repaid. Debt burden can shrink as a percentage of the budget while debt increases in absolute terms. That's simple math. <br /><br /> BradKhttps://www.blogger.com/profile/00311675925651145239noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-90495853065018866442014-06-25T13:58:29.498-05:002014-06-25T13:58:29.498-05:00Since Andrew Garland already emphasized so well th...Since Andrew Garland already emphasized so well the destructiveness and sheer idiocy of the Keynes Multiplier, and the consensus amongst professional economists is only on the problem not the solution, I'll once gain devote myself to beating the dead horse of my "Existential" (in the 50's French philosophy sense) economic theory (which I have been unsuccessfully flogging for years) back to life.<br /><br />Let me try explaining it this way: It's possible (for a period of time) to have a country in which almost nobody works. All manufactured goods are imported, construction crews (and material) for bridges and other infrastructure are imported, and what few jobs are available are mostly low-paying food-service jobs.<br /><br />How is this possible? After all, knowlegeable (that is, free-market) economists tell us that dollars spent buying products from overseas have to come back, and when they do they will create other jobs. True... unless those dollars are used NOT to buy products or services from us, but to buy assets we inherited from previous generations (buildings, companies, etc) or nature (forests, land, et cetera).<br /><br />I contend this is exactly what has been happening in the United States for the last several decades. And that by comparison most of the things professional economists focus on is pretty trivial. And I fear that unless professional economists embrace this theory the United States is doomed.<br /><br />(P.S. I call it my "Existential" theory because the old existentialist philosophers argued that by default most people will gladly give up their freedom in exchange for various [perceived] benefits.)<br />Neal Reynoldsnoreply@blogger.com