Monday, August 29, 2016
What is heterodox and what is orthodox?
That's one big question that I want to answer before I graduate.
After all, if Larry Summers, Paul Krugman, Joe Stiglitz, Dani Rodrik, Branko Milanovic, Thomas Piketty, George Akerlof and Paul Romer are the great thinkers and Nobel-winners who lead their discipline and represent economics to the public, shouldn't they be considered orthodox?
Here's some links to get me going, and hopefully I remember to come back here and actually read this stuff:
Jo Mitchell - on heterodox macroeconomics.
Noah Smith - economics without math is trendy.
Simon Wren-Lewis - heterodox and mainstream macroeconomics.
Lars Syll - dumb and dumber in modern macroeconomics.
Leigh Tesfatsion - agent-based economics: basic issues.
Larry Summers - disappointed by what came out of Jackson Hole. Quote:
I had high hopes for the Federal Reserve’s annual Jackson Hole conference. The conference was billed as a forum that would look at new approaches to the conduct of monetary policy—something that I have been urging as necessary given secular stagnation risks and the sharp decline in the apparent neutral rate of interest. And Chair Yellen’s speech in a relatively academic setting provided an opportunity to signal that the Fed recognized that new realities required new approaches.
The Federal Reserve system and its Chair are to be applauded for welcoming challengers and critics into their midst. The willingness of many senior officials to meet with the Fed Up group is also encouraging. And its important for critics like me to remember that the policy explorations of today often become the conventional wisdom of tomorrow. In this regard the fact that the Fed has now recognized that the decline in the neutral rate is something that is much more than a temporary reflection of the financial crisis is a very positive sign.
On balance though, I am disappointed by what came out of Jackson Hole judging by press reports since I was not there. First, the near term policy signals were on the tightening side which I think will end up hurting both the Fed’s credibility and the economy. Second, the longer term discussion revealed what I regard as dangerous complacency about the efficacy of the existing tool box. Third, there was failure to seriously consider major changes in the current monetary policy framework.
Additional points that I would have thought appropriate in commenting on near term policy include: (i) with current estimates of the real neutral rate running near zero and there being a downward trend it is far from clear that current policy is highly expansionary. (ii) It is plausible that hysteresis effects account for some of the decline in productivity growth and that if so allowing for rapid demand growth might have lasting supply side benefits. (iii) if a two percent inflation target was appropriate when the neutral real rate was thought to be two percent and stable, surely a higher target is appropriate when the neutral real rate is zero and unstable. (iv) in contrast to the risks of inflation exceeding two percent ,which are likely very small, the risks of a downturn are very serious. (v) the apparent rigidity of inflation expectations and insensitivity of inflation to measures of slack create extra uncertainties about the conventional idea that unemployment rates in the 4.5 percent range risk accelerating inflation.
As an aside, why shouldn't a zero inflation expectation be normal in this day and age? Fiscal conservatism has won, labour bargaining power has been eliminated, and the Fed has spent 35 years jacking up rates whenever inflation has shown up.
Don't 35 years of policy mean anything to inflation expectations?
Sunday, August 28, 2016
Branko Milanovic and Nassim Nicholas Taleb - why the super-rich may be indifferent to income growth in their own countries (pdf).
Unfortunately it's all math. I don't know why he needs to say this in math.
Reuters - global central bankers unite in plea for help from governments. Quote:
Central bankers in charge of the vast bulk of the world's economy delved deep into the weeds of money markets and interest rates over a three-day conference here, and emerged with a common plea to their colleagues in the rest of government: please help.
Mired in a world of low growth, low inflation and low interest rates, officials from the Federal Reserve, Bank of Japan and the European Central Bank said their efforts to bolster the economy through monetary policy may falter unless elected leaders stepped forward with bold measures. These would range from immigration reform in Japan to structural changes to boost productivity and growth in the U.S. and Europe.
Without that, they said, it would be hard to convince markets and households that things will get better, and encourage the shift in mood many economists feel are needed to improve economic performance worldwide. During a Saturday session at the symposium, such a slump in expectations about inflation and about other aspects of the economy was cited as a central problem complicating central banks' efforts to reach inflation targets and dimming prospects in Japan and Europe.
ECB executive board member Benoit Coeure said the bank was working hard to prevent public expectations about inflation from becoming entrenched "on either side" - neither too high nor too low. But the slow pace of economic reform among European governments, he said, was damaging the effort.
OK, sounds good so far....
"What we have seen since 2007 is half-baked and half-hearted structural reforms. That does not help supporting inflation expectations. That has helped entertain disinflationary expectations,” Coeure said.
So in reality the central bankers are asking for more "structural reforms", which in the past have always meant "reforms to destroy labour power and tank consumer demand while simultaneously opening up trillions of dollars worth of tax havens for the rich".
So I guess we can expect another 20 years of secular stagnation, then.
Saturday, August 27, 2016
Barry Eichengreen - presentation on inequality through history (pdf).
When you get to slide 16 it becomes rather obvious that economic inequality is almost entirely driven by exogenous political decisions, not by anything economically endogenous.
The new (post-1980) boost in inequality also turns out to be obviously the result of overt political action, since he notes it can be seen more in English-speaking countries than in continental Europe. Yet as he notes,
"skill-biased technological change (favoring the relatively well educated) and globalization (disfavoring the unskilled in the advanced countries) are the popular explanations."
It's funny that a social science so infused with politics tries so hard to deny the effect of politics.
Friday, August 26, 2016
Unfortunately I don't know the nuts and bolts of how interest rates got incorporated into owner equivalent rent (OER) in the 70s, so I'm not sure I understand CPI and OER.
But someone (Dean Baker?) has written about an interesting thing:
Apparently, sometime in the 70s the Fed changed the way it calculated CPI: it started to include change in mortgage interest in OER.
Obviously, that would have a tremendous impact on CPI readings later that decade: the Arab oil embargo, and later the Iranian revolution, generated massive short-term commodity-driven spikes in inflation.
But Dean Baker (or someone whose paper he came across, I dunno) has apparently gone into the inflation data and found that, if you back out the inflation/interest component of OER, there actually was no inflation problem in the 70s aside from those two supply shocks.
As I said, I don't know enough about the mechanics of OER and CPI calculation, and I can't find the paper (if there is one) that explains this stuff in detail. But own my own I can see massive methodological problems with incorporating inflation into CPI:
1) if you take the aggregate mortgage costs as changing with interest rates (debatable, see 2 below), then the NPV of future payments with which you might calculate OER is only known post-hoc: you can't extrapolate NPV from the present rate, because the present rate will continue to change, and compounding can introduce almost an order of magnitude of error! So it depends how OER amortizes this incredibly indefinite NPV.
2) In my own parent's case, they were locked in at 6.25% all through the 70s, so couldn't you say their OER went *down* in real terms? Basically the Fed would have to incorporate into its calculations some measure of how many mortgages are locked-in, and then (for the locked-in crowd) adjust their OER for future increased wealth (see 4 below).
3) Mortgage interest, in the US, is tax-deductible anyway, so wouldn't that make the delta of OER deductible?
4) Housing's an asset, so if rapid house price accumulation eats into current consumption, it'll also radically increase future income (in something like a sophomore economics 2-period everybody-dies model). Essentially, OER is paying for an asset (and theoretically thus paying for future income): it's not consumption. Essentially the home owner is getting that money back someday.
5) And does an interest-adjusted OER also take into account how increasing home prices increase the wealth of home owners with no mortgage?
6) If we incorporate price inflation of housing assets into CPI, why not incorporate price inflation of other assets, like stocks?
7) Similarly, if interest rate increases inflate OER, does the Fed also take into account the effect of interest rate increases on the NPV of firms' capital? I.e., is corporate rented-to-own capital treated the same in CPI?
Thursday, August 25, 2016
I guess you need something a bit stronger than NetLogo to model the economy with A HUNDRED AND FIFTY MILLION AGENTS:
This is just so damn cool.
But I think you can probably get away with a few orders of magnitude less than 150 million agents.
I'd like to hear the argument against that.
Wednesday, August 24, 2016
WSJ - paid sick leave reduces flu transmission. Quote:
Everyone knows staying home from work when you have the flu helps protect your co-workers from getting sick.
Just as an aside, it also helps protect your older relatives who don't even go to work but are still exposed to the flu, and who are much more likely to die from it. But please continue:
Unfortunately, not everyone does it.
A new National Bureau of Economic Research paper argues that one reason for that is access to paid sick leave. The paper by Stefan Pichler and Nicolas R. Ziebarth argues that the general flu rate “decreases significantly” when employees have access to paid time off due to illness. It also found that more people play hooky, or stay home when they aren’t actually contagious.
Unlike most industrialized countries, U.S. workers are not guaranteed pay when they take off from work due to an illness. Messrs. Pichler and Ziebarth say half of American workers don’t have access to paid sick leave.
In the U.S., the fight over access to paid sick leave has largely been about income inequality. Labor Department data from 2015 shows that only around 31% of the lowest-earning quarter of private-sector workers had access to paid sick leave, while 84% of the highest-earning quarter did.
And is this just a sad result of 19th-century economic orthodoxy? No:
While some cities and states have implemented sick leave schemes, there has been a simultaneous effort by some Republican-dominated state legislatures to preemptively ban cities from implementing rights to paid sick leave.
Yup, as we can see, it's active class warfare by a party that intends to do whatever it takes to put the boots to working people with every action.
Tuesday, August 23, 2016
Brad Setser - IMF hooked on fiscal consolidation worldwide. Quote:
In theory, the IMF now wants current account surplus countries to rely more heavily on fiscal stimulus and less on monetary stimulus.
This shift makes sense in a world marked by low interest rates, the risk that surplus countries will export liquidity traps to deficit economies, and concerns about contagious secular stagnation. Fiscal expansion tends to lower the surplus of surplus countries and regions, while monetary expansion tends to increase external surpluses.
And large external surpluses should be a concern in a world where imbalances in goods trade are once again quite large—though the goods surpluses now being chalked up in many Asian countries are partially offset by hard-to-track deficits in “intangibles” (to use an old term), notably China’s ongoing deficit in investment income and its ever-rising and ever-harder-to-track deficit in tourism.
In practice, though, the Fund seems to be having trouble actually advocating fiscal expansion in any major economy with a current account surplus.
Best I can tell, the Fund is encouraging fiscal consolidation in China, Japan, and the eurozone. These economies have a combined GDP of close to $30 trillion. The Fund, by contrast, is, perhaps, willing to encourage a tiny bit of fiscal expansion in Sweden (though that isn’t obvious from the 2015 staff report) and in Korea—countries with a combined GDP of $2 trillion.
How can anyone still believe that secular stagnation is caused by any sort of endogenous characteristic of economies, when there's tens of trillions of dollars being committed to crushing demand and increasing savings every year as the result of overt political decisions?
Saturday, August 20, 2016
I'm sorry, this just looks bad:
St. Louis Fed - does government spending create jobs? Quote:
Research Analyst Rodrigo Guerrero and I took up the issue of the efficacy of government spending at increasing employment. We looked specifically at over 120 years of U.S. military spending, which provides a kind of "natural experiment" for our analysis.
Looking at government spending more generally suffers from the problem that the spending may be correlated with economic activity: The government may spend more during a recession (as with ARRA) or more during an expansion (when tax revenues are high). This might bias the results, which economists call "an endogeneity bias."
Military spending, on the other hand, is likely to be determined primarily by international geopolitical factors rather than the nation's business cycle.
And no surprise at what they find:
We used a similar methodology and found that military spending shocks had a small effect on civilian employment. Following a policy change that began when the unemployment rate was high, if government spending increased by 1 percent of GDP, then total employment increased by between 0 percent and 0.15 percent. Following a policy change that began when the unemployment rate was low, the effect on employment was even smaller.
Yeah, don't you see the problem?
You've factored out all government spending associated with economic activity. But Y correlates with L.
So that means you've factored out any government spending that correlates with jobs.
So it wouldn't surprise me that you've found that the government spending that's not correlated with jobs is not correlated with jobs.
I also think it's faulty methodology to use 120 years of military spending, because those periods will include:
1) American pre-war and intra-war isolationism;
2) WWII's command economy, with its wage and price controls; and
3) the wasteful spending of post-WWII's military-industrial complex.
That is one big fallacy of analogy there.
Friday, August 19, 2016
Larry Summers - John Williams on the low r*. Quote:
Williams rightly if rather tentatively draws the conclusions that a chronically very low neutral rate has important policy implications. He stresses the desirability of raising r* by pursuing structural policies to raise growth and affirms the importance of fiscal policy. I yield to no one in my enthusiasm for improved education and educational opportunity but I do not think it is plausible that it will change the neutral rate appreciably in the next decade given that the vast majority of the 2030 labor force will be unaffected.
If Williams is overenthusiastic on education, he is under enthusiastic on fiscal stimulus. He fails to emphasize the supply side benefits of infrastructure investment that likely enable debt financed infrastructure investments to pay for themselves as suggested by DeLong and Summers and the IMF. Nor does he note at current interest rates an increase in pay as you go social security could provide households with higher safe returns than private investments. More generous Social Security would likely reduce the saving rate, thereby raising the neutral interest rate with no change in budget deficits. Nor does Williams address the possibility of tax measures such as incremental investment credits or expansions in the EITC financed by tax increases on those with a high propensity to save. The case for fiscal policy changes in the current low r*’environment seems to me overwhelming and much can be accomplished without any increase in deficits.
Won't happen because political economy. And as K-dog points out, economic orthodoxy in general also should take the blame:
The Krugginator - slow learners. Quote:
Yet as Larry says, the paper is still weak and tentative even on monetary policy, to an extent that’s hard to understand:
I am disappointed therefore that Williams is so tentative in his recommendations on monetary policy. I do understand the pressures on those in office to adhere to norms of prudence in what they say. But it has been years since the Fed and the markets have been aligned on the future path of rates or since the Fed’s forecasts of future rates have been even close to right.
Furthermore, there’s basically no break with orthodoxy on fiscal policy, despite the evident importance of the liquidity trap, evidence that multipliers are fairly large, and basically zero real borrowing costs.
Yet Williams is at the cutting edge of policy rethinking at the Fed. And in general mainstream thinking about macroeconomic policy has changed remarkably little, remarkably slowly.
You might say that it is always thus. But, you know, it isn’t.
I fairly often find myself comparing the intellectual response to the financial crisis and its aftermath with the response to the emergence of stagflation in the 1970s. I say the 70s, but really stagflation emerged as an issue in 1974, after the first oil shock, and pretty much ended with the Volcker double-dip recession of 1979-82 – a recession whose end implication was that monetary policy continued to work in a fairly Keynesian way. So it was well under a decade of experience; yet it utterly transformed how everyone talked about macroeconomics.
Then came the 2008 crisis. As I’ve written many times, events since that crisis have played out pretty much the way someone who knew their Hicksian IS-LM would have predicted – but that should have been shocking to the many people, both in policy circles and in the economics profession, who dismissed that kind of economics as worthless, proved false, whatever. And the sheer persistence both of depressed economies and of low inflation/interest rates should by now have led to a big rethinking. Depression economics redux has now gone on as long as stagflation did.
Yet rethinking has been glacial at best. People who warned about the coming inflation in 2009 are warning about the coming inflation in 2016. Orthodox fears of budget deficits still dominate a lot of discourse. And the Fed still clings to an inflation target originally devised in the belief that the kind of thing that has happened to our economy would never happen.
I’m not entirely sure why learning has been so slow this time. Part of it, I suspect, is that the anti-Keynesian backlash of the 1970s had a lot of political power, and behind the scenes a lot of money, behind it – which influenced even academics, whether they realized it or not. And these days that same power and money is deployed against any rethinking.
Whatever the explanation, however, it’s taking a painfully long time for serious policy discussion to arrive at a point that should have been obvious years ago.
Not hard to understand. You've got Krugman, Summers, Stiglitz, and a dozen other leading lights of the economics profession advocating a simple solution to the problem of prolonged economic depression; but all of undergraduate economics seems to be teaching the exact opposite, and most politicians apparently hewing to the kill-all-government line of Murray Rothbard and Ayn Rand.
What do you expect the economic result to be?
So it's not enough that I'm going to be learning Scilab at university this fall.
I want to learn multi-agent programming, and apparently the easiest language to use is NetLogo.
Thankfully, Jose Vidal at USC has an entire video playlist where he leads you through learning NetLogo.
Youtube - Jose Vidal's NetLogo tutorials.
And you can download and install NetLogo for free from the NWU website.
Reuters - global negative-yielding debt slips to $11.4T. Quote:
The global amount of negative-yielding government bonds edged down to $11.4 trillion on Aug. 2 from two weeks ago as Japanese debt yields rose in reaction to more official stimulus announcements, Fitch Ratings said on Wednesday.
On July 15, there were about $11.5 trillion in sovereign bonds with negative yields in Japan and Europe, whose central banks adopted negative rate policies and have been purchasing bonds heavily in an effort to stimulate their sluggish economies.
Japanese government bonds accounted for more than half the negative-yielding debt with $7.2 trillion, down from $7.5 trillion two weeks earlier and $7.9 trillion on June 27, the rating agency said.
OK, then riddle me this.
Why shouldn't trillions of dollars of debt be negative-yielding, when:
1) decades of work by the IMF has aimed at making governments more reliable debtors, thus reducing the default risk premium on their debt;
2) there's been a similar move for decades to increase domestic saving worldwide, as a way of making government (and I guess corporate?) debt more sustainable, and an increase in saving should drop the S-I equilibrium rate of interest;
3) there's been decades of pro-rich and pro-corporate tax policy meant to increase the savings of the rich, eliminate corporate taxes and construct tax havens, which again means S-I equilibrium r goes down;
4) there's been decades of anti-poor tax and income policy which would obviously decrease consumer demand in the majority of the population, meaning less investment demand and again equilibrium r goes down;
5) there's been decades of "inflation targeting" that's now built an expectation of periodic massive layoffs and demand destruction whenever inflation goes above 2%, dropping equilibrium r and also reducing the inflation risk premium on debt;
6) there's been decades of political campaigning against government spending, to the point that now the US isn't even meeting its spending requirements to counteract depreciation of public assets, which reduces public investment and increases private savings, again equilibrium r goes down;
7) there's been years of pro-austerity propaganda to the point that the EU, a major economic bloc, explicitly wishes to stay in a prolonged economic depression instead of stimulating demand, which means again higher S and lower I?
Seriously, "secular stagnation" seems a childishly obvious result of decades of political policy. You guys wanted zero inflation and low interest rates, now you got it and you complain?
Branko Milanovic - on Nils Gilman's The Twin Insurgency. I happily quote from Gilman's article in the spirit of fair academic comment:
The postmodern state is under siege from plutocrats and criminals who unknowingly compound each other’s insidiousness.
States within the global political economy today face a twin insurgency, one from below, another from above. From below comes a series of interconnected criminal insurgencies in which the global disenfranchised resist, coopt, and route around states as they seek ways to empower and enrich themselves in the shadows of the global economy. Drug cartels, human traffickers, computer hackers, counterfeiters, arms dealers, and others exploit the loopholes, exceptions, and failures of governance institutions to build global commercial empires. These empires then deploy their resources to corrupt, coopt, or challenge incumbent political actors.
From above comes the plutocratic insurgency, in which globalized elites seek to disengage from traditional national obligations and responsibilities. From libertarian activists to tax-haven lawyers to currency speculators to mineral-extraction magnates, the new global super-rich and their hired help are waging a broad-based campaign to limit the reach and capacity of government tax-collectors and regulators, or to manipulate these functions as a tool in their own cut-throat business competition.
Well, you can stop right there. False dichotomy.
The only difference between the plutocratic class and criminal class, as identified, is that the former has political and financial power.
And reading the rest of Milanovic's post (lazy me), it seems he agrees:
It is therefore I think massive corruption at the top and ideological change that have empowered the so-called deviant globalization. If president of a country can sell favors, why cannot a drug lord sell his goods? If the rich can open thousands of accounts containing billions of dollars in tax havens, why should a small hotelier in Greece pay taxes? If the law applies selectively, then you need to carve out your dominion where you will be the boss. This is how the extra-state areas of which Nils Gilman writes have come into being.
The essential point to take is that the two insurgencies go together: without plutocratic-criminal insurgency at the top, there would be no deviant criminal insurgency at the bottom. The only point on which I might differ from Gilman is that he applies the adjective “criminal” to the bottom insurgency only.
Good to know I came to the same conclusion as Branko Milanovic.
A bit of googling informs me that Nils Gilman's just writing another article on his long-running topic of deviant globalization. OK, that's fine: there are some features of globalization that are naughty and bad (sorry, I haven't even read the Coles Notes on the topic).
But "deviant globalization" still begs the question of what is the normative globalization that you'd contrast it with, right?
I mean, absent any economic globalization and with all economies closed, you'd still have a slave trade in Mauritania, a child sex trade in Thailand, a hacker trade in eastern Europe, a kleptocracy trade in Russia, and so on. "Globalization" in the economic sense just means the opening of economies, which means all forms of economic behaviour start to cross borders and not just the "normative" ones.
Maybe watching this video will help me understand this?
Yup, it seems that's what Gilman's saying. Globalization provides the space for "deviant" activity to go transnational just as much as normative activity.
But I'm still wondering who gets to call some economic activity "deviant". Is Gilman really advocating for a new economic imperialism, where the West imposes its copyrights and environmental standards on China, its control of refugee flows on the Middle East, and its wildlife respect on Africa? Doesn't that beg the question of whether the West itself is involved in deviant economic activity, or whether the West has ethical superiority?
And thus I guess you get back to Milanovic's two paragraphs, above.
It's actually surprising how much of the first few chapters of Graeber's Debt is actually just a quotation of this article by Alfred Mitchell Innes from 100 years ago:
Alfred Mitchell Innes - what is money? Copyright must have run out by now, so here's a lot of quotation after a breakline:
Tuesday, August 16, 2016
I'll preface this by saying I do not trust people who associate with Marshall Auerback, because he likes appearing on Vladimir Putin's disinformation & propaganda network Russia Today.
Then again, I lived through the previous Cold War.
Nevertheless, complexity economics is the sort of thing I'd like to get into in graduate school:
Weird that he's in my math department and not my economics department.
This brings up an interesting idea:
If, for example in the case of a labour market, you're saying "there's the labour supply curve derived from the labour-leisure utility model, and there's a labour demand curve derived from MPL, and where the curves intersect you get an equilibrium", to what extent is that really a "microfoundation"?
I mean, instead of aggregating all labourers and assuming a constant utility curve, and aggregating all firms and assuming a single MPL, and assuming no firm has market power over labour, and assuming a magical auctioneer that acts as the mechanism of equilibrium, why not instead build a microfoundation on a market of heterogeneous agents that individually enter into trades based on their own power, strategies and the prevailing environment?
What sounds like more of a microfoundation to you?
Should be easy to do with computers nowadays, I'd think.
Bill McBride at Calculated Risk says he swears by Ed Leamer:
NBER - Housing is the business cycle. Quote from the paper:
The good news is that I am not a macro-economist. That frees me from the heavy conceptual burdens that most macro economists seem to carry. It allows me to conclude that Keynesian thinking, monetarism, rational expectations and real business cycles all suffer from the same problem – too much theory and not enough data. In particular, none of these comes to grips with the role of housing in modern US recessions.
Indeed, if you look up “real estate” in the index to Mankiw’s(2007) best selling Principles of Macroeconomics, you will find real exchange rates, real GDP, real interest rates, real variables, and even reality, but no real estate. Under “housing” you will find a reference to the CPI and to rent control, but no reference to the business cycle. I have not been able to find any macroeconomic textbook that places real estate front and center, where it belongs.
One thing I was wondering when I took my intermediate macro was, why don't we break down "investment" into inventories, business capital investment, government infrastructure, and housing? I mean, if investment swings are greater than the swings in overall GDP, why not look under the hood and see what's really going on with investment?
Leamer notes that his theory doesn't explain the 2000-2001 crash; maybe the explanatory variable, then, isn't so much housing as it is asset prices generally?
Still, he presents a good idea, though it's not written in the style of academic economics, which is probably good.
Monday, August 15, 2016
Sunday, August 14, 2016
Doyne Farmer is quite a critic of mainstream economics:
When you think about it, though, now that we're in the 21st century and everyone has a super-powered computer on their desktop, why shouldn't economics do complicated agent-based modeling? That seems to me to be just a 21st-century way of developing microfoundations.
Anyway, I'm taking a 3rd-year modeling class from the math department this fall because this is the sort of thing I'd like to get into.
Brad Setser - the IMF is pushing for yet more EZ fiscal consolidation. This sounds to me more like a failure of the IMF as a policy-setting institution than anything else. Here's the top-level policy recommendation:
The eurozone collectively has a substantial external surplus, and its economy is operating below potential. In the framework set out in the IMF’s external balance assessment, that pretty clearly calls for fiscal expansion:
“Surplus countries that have domestic slack need to rely more on fiscal policy easing, which would address both their output gaps and their external gaps… Meanwhile, deficit countries should actively use monetary policy, where available, to close both internal and external gaps.”
But then the top-level policy recommendation gets countermanded in the fine print:
The capacity for a common eurozone fiscal policy conducted through borrowing by the center doesn’t currently exist, and it realistically isn’t going to materialize next year.
That means the eurozone’s aggregate fiscal impulse is the sum of the fiscal impulses of each of its main economies. What does the IMF recommend there?
In Italy the IMF seems to want about a half a point of structural fiscal consolidation (see paragraph 35 of the staff report).
In France, the same (see paragraph 33 of the staff report).
In Spain, the last IMF article IV called for a half a point of consolidation as well (see paragraph 33). That though is likely to be ratcheted up, as Spain hasn’t done much consolidation over the past two years and now will need to engage in a major consolidation to get to the Commission’s 3 percent of GDP fiscal target in 2018.
Spain, Italy, and France collectively account for a bit more of the eurozone’s GDP than Germany and the Netherlands.
So, is the IMF recommending enough fiscal expansion in Germany and the Netherlands to assure a positive fiscal impulse for the eurozone as a whole? No.
The IMF is now advocating that Germany avoid returning to a structural surplus, and invest any windfall savings from higher than expected revenues or lower interest rates. But the IMF isn’t advocating Germany do any more on net than it already had done. Germany delivered a significant stimulus is 2016, but it was a one and done stimulus. Germany isn’t projected to generate a positive fiscal impulse in 2017.*
The Netherlands needs stimulus on purely domestic grounds given persistent weakness in household demand and an ongoing output gap (see the “Tricky Balance” chart in the IMF’s external balance assessment). And the IMF did recommend a modest fiscal expansion in its last assessment of the Dutch economy. But also it didn’t protest too much when the Dutch government politely declined. See paragraphs 14 and 15 of the 2015 staff report.
Bottom line: Germany’s 2017 fiscal impulse is projected to be neutral. The fiscal expansion the IMF recommended in the Netherlands for 2017 is not likely to be adopted and even if adopted it would be too small to offset the fiscal consolidation the IMF is recommending in Spain, Italy, and France. Given the weight of France, Italy and Spain in the eurozone, this implies the IMF is recommending that the eurozone as a whole consolidate next year.
So, again, it looks like the IMF's top-level realists are being ignored in favour of yet more fiscal retrenchment at the national level of every country.
Either that or they expect Chinese stimulus to carry the world again.
So I guess China's big 2009 stimulus created one hell of a moral hazard that is now resulting in a Western fixation on continuous fiscal consolidation.
PIIE - Olivier Blanchard: do DSGE models have a future? (pdf). Some quotes:
There are many reasons to dislike current DSGE models.
They are based on unappealing assumptions. Not just simplifying assumptions, as any model must, but assumptions profoundly at odds with what we know about consumers and firms.
Go back to the benchmark New Keynesian model, from which DSGEs derive their bone structure. The model is composed of three equations: an equation describing aggregate demand; an equation describing price adjustment; and an equation describing the monetary policy rule. At least the first two are badly flawed descriptions of reality: Aggregate demand is derived as consumption demand by infinitely lived and foresighted consumers. Its implications, with respect to both the degree of foresight and the role of interest rates in twisting the path of consumption, are strongly at odds with the empirical evidence. Price adjustment is characterized by a forward-looking inflation equation, which does not capture the fundamental inertia of inflation.
Saturday, August 13, 2016
I've started up this blog as
1) a record of my undergrad career trying to learn real economics, not just the Republican/libertarian propaganda in American-published undergraduate textbooks.
2) a more "professionally presentable" blog than what I've published before - though I guess (1) above has kinda pooched that project right away, hasn't it?
But re: (1) above, and the title of this blog generally, I think it needs explaining: