Should the Fed risk inflation to spur growth?

The New York Times asked me and two others this question for its "Room for Debate" blog. My answer follows. Not news for readers of this blog, but maybe a fun concise summary

Should the Fed risk inflation to spur growth? The Fed is already trying as hard as it can to spur growth, and to create some inflation. The Fed has created about two trillion dollars of money, set interest rates to zero, and promised to keep them there for years. It has bought hundreds of billions of long-term government bonds and mortgages in order to drive those rates down to levels not seen in a half a century.

Inevitable slow recoveries?

The economy is stuck in slow growth, not the fast growth we should see after a steep recession. (See previous post here, as well as John Taylor on the subject)

But we've heard the defense over and over again: "recoveries are always slower after financial crises."  Most recently (this is what set me off today) in the Washington Times,

Many economists say the agonizing recovery from the Great Recession...is the predictable consequence of a housing market collapse and a grave financial crisis. ... any recovery was destined to be a slog.

“A housing collapse is very different from a stock market bubble and crash,” said Nobel Prize-winning economist Peter Diamond of the Massachusetts Institute of Technology. “It affects so many people. It only corrects very slowly.”

This argument has been batted back and forth, but a new angle occurred to me: If it was so obvious that this recovery would be slow, then the Administration's forecasts should have reflected it.  Were they saying at the time, "normally, the economy bounces back quickly after deep recessions, but it's destined to be slow this time, because recoveries from housing "bubbles" and financial crises are always slow?"

No, as it turns out. I went back to the historical Administration Budget proposals and found the "Economic Assumptions" in each year's "Analytical Perspectives." This gives the Administration's forecast at the time.

Here is actual real GDP (black line) together with the Administration's forceasts (blue lines). The red line is the current blue chip consensus (also as reported in the budget), which I'll get to in a minute.

As you can see, there is nothing like an inevitable, forecastable, natural, slow recovery from a financial crisis or "housing bubble" in the administration's forecasts.

Their forecasts at the time look just like my quick bounce-back-to-the trend line that you see in my previous posts, and John Taylor's, and lots of others'. And they are surprised each year that the fast recovery doesn't happen.

Bloomberg TV Interview

An interview on the Tom Keene's show this morning on Bloomberg TV


I always feel bad after these things, that I could have answered much better or clearer. Or found a better tie. Well, we do what we can. A direct link

The mismeasure of inequality

Kip Hagopian and Lee Ohanian have a wonderful new policy review titled "the mismeasurement of inequality."  Calmly, and with careful grounding in facts and review of research, it destroys most of the current liberal myths about the amount of inequality and its importance. The promise:

We will show that much of what has been reported about income inequality is misleading, factually incorrect, or of little or no consequence to our economic well-being. We will also show that middle-class incomes are not stagnating; in fact, middle-class incomes have risen significantly over the 29 years covered by the cbo study. Lastly, we will address assertions that the rich are not paying their “fair share” of taxes

"Address" should be "destroy", but they're being careful. Some nuggets:

Subsidies for economists?

My colleagues Gary Becker and Jim Heckman have an interesting OpEd in the Wall Street Journal, arguing for Federal funding for economists. I respectfully disagree.

Just how bad is the economy?

The second-quarter GDP numbers came out. The newspapers and Republicans pounced on low growth and anemic job growth. The Democrats rebut growth is growth and tell us of the steady job gains. How bad is the economy?

Economists know that levels matter, and that long-run growth matters more than anything else. I made a few graphs to emphasize these points.

Start with the level (in logs) of real GDP. (This is an update of a graph I saw on John Taylor's blog.)

Looking at levels you see the current awfulness better than by looking at growth rates. GDP declined almost 5% in the recession, but then started growing at a glacial pace, averaging 2.4% since the trough.  We seem stuck in this slow growth trap.

Myths and Facts About the Gold Standard

This is a July 28 2012  Wall Street Journal OpEd with a few of their cuts restored.

While many people believe the United States should adopt a gold standard to guard against inflation or deflation, and stabilize the economy, there are several reasons why this reform would not work. However, there is a modern adaptation of the gold standard that could achieve a stable price level and avoid the many disruptions brought upon the economy by monetary instability.

Let's start by clearing up some common misconceptions. Congressman Ron Paul's attraction to gold, and Federal Reserve Chairman Ben Bernanke's biggest criticism, is that a gold standard implies an end to monetary policy and the Federal Reserve. It does not.

Krugman, Delong and Inflation

Quite a few commenters and correspondents have asked me what I think of the latest blast, "What Chicago Doesn't Know" from Krugman and the obliquely-titled "The need for a higher rate of increase in prices" from Brad DeLong.

Yes, I've been worried for some time that our current debt could lead to inflation. And yes, that inflation has so far not happened, and US government interest rates remain low.

Well, they made fun of Friedman when he said in 1968 that inflation was coming. They made fun of Greenspan when he said in 1996 that stocks seemed awfully high, and stocks went up for a few more years. They made fun of Shiller when he said in 2005 that house prices looked awfully high, and they went up for a few more years. Greek interest rates were really low in 2007.

Krugman asks whether I have realized I have the "wrong model." My model is arithmetic.

A good Greek story

Matt Jacobs sent along a link to a great story from Greece on Reuters,  "Lessons in a shrimp farm's travails." The whole article is worth reading, but here are a few tidbits:

Just over a decade ago, Napoleon Tsanis set out from Sydney with 11 million euros and a dream to build a shrimp farm in his ancestral homeland... What he got was years of wrestling Greek bureaucracy and a court battle with a civil servant...

Six policies from NPR

"Six policies economists love (and politicians hate)" From NPRs Planet Money

The Planet Money team got together a group of economists from widely differing political backgrounds, and came up with this very nice list of policies the economists all agreed on--which are all regarded as hopeless in the standard political debate.

1. Eliminate the mortgage tax deduction.
2. End the tax deduction companies get for providing health-care to employees.
3. Eliminate the corporate income tax. Completely.
4. Eliminate all income and payroll taxes. ... Instead, impose a consumption tax.
5. Tax carbon emissions. 
6. Legalize marijuana.

It is often perceived that economists don't agree on anything, or that economists are pretty much just like everyone else in the spectrum of their policy views -- that economics training really has no clarifying effect on one's worldview. This list is a nice counterexample. We could probably safely add eliminating all agricultural subsidies and free trade.

(I quoted the proposals as above. In fact, the health tax exemption applies to individuals, and it's for employer-provided group health insurance, not care.  Hat tip, I found the NPR story in a nice post on econlog)

Powell Post

Jim Powell has a very nice article at Forbes,with his trademark combination of thoughtful comment and detailed facts.

I love his litany of ways that the government subsidizes and taxes the same activity. Hmm, I wonder what maximizes the need of all sides to come ask for favors. It's a great list for those of you who think that regulation in practice achieves much of anything coherent:

Government is actually a big bureaucracy run amuck, a vast tangle of contradictions that often have harmful consequences.  For instance:

• Politicians scold citizens for consuming too much sugar, but the government provides subsidies for producing high fructose corn syrup that’s widely used in sodas, cookies and other sweets.
• Taxes are higher because government subsidizes some farmers to grow crops and subsidizes other farmers not to grow crops.

Who is for growth?

This weekend, a prominent columnist delivered some brilliant advice to a presidential candidate:

...make America the launching pad where everyone everywhere should want to come to launch their own moon shot, their own start-up, their own social movement. We can’t stimulate or tax-cut our way to growth. We have to invent our way there....

More weird behavior in high frequency markets

Today's Coke and IBM markets are jumping every hour on the hour.  Does anyone know what the heck is going on? One guess received: another case of algorithms gone wild. But whose, and on the hour, exactly? And are there no humans left to counter this sort of thing? Looking at the google finance plot (source here) this started exactly at the open today and seems to have petered out. (Thanks Giovanni Puma for sending me the pictures.)

Common sense from France

Today's WSJ has a lovely editorial from Pascal Salin, professor emeritus of economics at the Université Paris-Dauphine. It echoes many of the things I've said about the euro crisis, but with deeper political insight....and it's from France.

A few tidbits with comment

Contrary to what is claimed daily in the media by politicians and many economists, there is no "euro crisis." The single currency doesn't have to be "saved" or else explode.

Forget the mandate

(This is a Bloomberg "business class" oped, July 1. I got frustrated how the health care discussion has gotten stuck in a rut, "see, Obama's raising your taxes." "No, it's a penalty." Blah Blah.) 

On June 28, the Supreme Court upheld President Barack Obama’s health-care law. Opponents and supporters are still sparring over whether its mandate is a tax. It’s time to get over this debate. The mandate’s mild penalty was never this law’s central economic and policy flaw.

The distinctions among a mandate, a tax, a penalty, or a credit, and between federal and state powers, are important legally and constitutionally. But they are irrelevant in economic terms for this law.

The Devaluation Chorus Sings again

The chorus to devalue (and then inflate) the euro as the key to solving Europe's ills is singing again.

Ken Griffin and my colleague Anil Kashyap have a big OpEd on the Euro in the New York Times. They want Germany to leave the Euro, followed by quick euro depreciation relative to the Mark and Dollar.

Martin Feldstein, writing in the Wall Street Journal, echoes this faith in devaluation

The only way to prevent the dissolution of the euro zone might be a sharp decline in the value of the euro relative to the dollar and to other currencies

As you might have guessed, I think it's a terrible idea.

Two More Cents on the Obamacare Decision

Update from the last post on the Supreme Court decision

There is in fact a huge difference between a tax on people without health insurance and a mandate enforced with a penalty.

A mandate is a mandate, a law that everyone must have health insurance. If the minor penalty envisioned in the ACA isn't sufficient (it's not) to get people to buy health insurance, it was entirely within HHS power to find more effective means of enforcement.  They could literally have sent inspectors around and drag you off to jail for not having health insurance.

A tax is only a tax.  If you pay the tax, there is nothing else they can do to you. And taxes have to be approved by Congress, not just HHS. And there is no way Congress is going to vote in a $10,000 head tax for not having health insurance. 

New Paper

In my "real" academic life, I just finished a new paper, "Continuous-Time Linear Models," find it here if you're curious.  It's a pedagogical piece really, showing how to do all the familiar discrete-time time-series tricks in continuous time.  Comments welcome. I thought of advertising it as evidence that blogging hasn't turned my mind to mush, but I'm afraid real continuous-time econometricians will see it as proof of the opposite proposition.

My 2 Cents on the Supreme Court and Obamacare

I think the court did the right thing. And pretty much what I expected.

They overturned the mandate under the commerce clause. Hoorray! There is some limit to the commerce clause!  I think they had to do this. If they upheld the whole thing, they would have said there is no limit whatsoever to Federal power.

They upheld the mandate as a tax. Swallow hard, free-market friends.

Sand in the gears

Today's Wall Street Journal has a beautifully informative editorial, "Employment, Italian Style." Snippets:

Once you hire employee 11, you must submit an annual self-assessment to the national authorities outlining every possible health and safety hazard to which your employees might be subject. These include stress that is work-related or caused by age, gender and racial differences. You must also note all precautionary and individual measures to prevent risks, procedures to carry them out, the names of employees in charge of safety, as well as the physician whose presence is required for the assessment.