no opinion is an anus

"To be honest, I have no idea what will do the trick. There is unlikely to be another WW2, another G.I. bill, another 50s-type broad-based economic boom. Hopefully Belmont is just ahead of the game, and the working class is about to make the same positive changes - decreasing divorce, increasing civic engagement - that the educated class made in the 90s and 00s. But if not, I'm out of ideas."

taylor made

" In a piece yesterday, Paul Krugman disagrees with my assessment that there was more overheating than slack in the economy in the years leading up to the 2007-09 recession and financial crisis. That assessment was one part of a broader critique I was making of a secular stagnation hypothesis.

First, Krugman says that by using an overall GDP price index for which inflation rose during the years from 2003-2005 I am picking “whatever price index makes the point,” and thus employing “Another Taylor Rule.” No. I used an overall price index for GDP in the original Taylor Rule proposal going back two decades now. There’s no picking and there’s no new rule here.  Rather than taking out food and energy price inflation I controlled for price volatility in that rule by averaging overall inflation over time. Simply taking out food and energy price inflation can lead to policy errors especially when such inflation lasts for more than a short time. And it is not only the overall GDP price level. The CPI inflation rate was also rising, not falling, during this period.

In any case, the increase rather than a decrease in overall inflation was only one part of my assessment that this was not a slack period. I also discussed the unemployment rate—which got quite low (4.4%) rather than high as in slack periods—and the huge housing boom with high housing price inflation.

Krugman does not even consider the unemployment rate in his response, and he simply dismisses the possibility that housing price inflation running at over 15 percent per year before the crisis was a sign of excesses.  Instead he talks only about the housing bust and the downturn. But the bust followed the boom—as is so often the case. In my view, the boom and excessive risk-taking which lead to the bust was exacerbated by lax regulatory and monetary policy.

As I discussed in my 2009 book  Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis “you have to look at more than inflation to assess the situation. Monetary economists have been concerned for years about the erratic nature of monetary policy, creating booms and then slamming on the brakes. Milton Friedman’s Newsweek columns were filled with that kind of complaint. In my view that has been a major problem with monetary policy in the past few years, after two decades of good systematic performance beginning in the early 1980s.”

Krugman finishes his piece by claiming that I always argue that policy is too loose.  No. I am in favor of rules-based policy, not perpetual tightness or ease. If the federal funds rate had been adjusted more promptly in 2003-2005 (following the type of rule that described policy in the 1980s and 1990s), then it would not have had to rise above 4%.  But instead it went over 5%. In this sense policy was too easy in 2003-2005 and too tight in 2006-2007.

Regarding the current unconventional monetary policy, I have long argued that it creates a two-sided risk: the risk of lower growth and the risk of higher inflation. Thus far the realized risk has been low economic growth with high unemployment. In my view, poor economic policy has been to blame."

his prayers are rarely answered...i'm told

chi-eggs

comparative class distributions of monetary and fiscal control channels

where's the research ?

tighening noose gig: watch estimated national NAWRU chase Spain's real UE rate

a  NAWRU calculation:    the best blanket toss on space ship earth

germany bullied EZ ... who's the bigger pig now ? ripped from PK's scrap book

Germany herself?




simple fiendish "how to "  value repressor mechanism
used  to  "belower " the  shadow mark 


"

more holes then asses or more asses then holes ?

"On the basis of the findings presented here, US policymakers can expect that measures taken to impede or retard US MNC expansion abroad will weaken job creation, investment, R&D, and exports at home, rather than strengthen or enhance domestic economic activity"

"When a US firm increases employment at its foreign affiliates by 10%, employment by that same firm in the US goes up by an average of 4%. Capital expenditures and exports from the US by that firm also increase by about 4%. R&D spending – which is associated not just with overall US employment but with employment in highly skilled and highly paid jobs – increases by 5.4%. "




teddy rocksoff


here's more close ups of teddy and company's
                              crooked trip thru the bullrushes :


"What about a counterfactual scenario? What would happen at home if MNC expansion abroad were limited or made more difficult? It is impossible to know precisely what would happen at home if a US firm engaged in less activity abroad. On the basis of our findings of positive interactions between increases in measures of firm activity at home and firm activity abroad, it appears plausible that increasing foreign-affiliate activity increases the overall productivity of an MNC in a way that leads to higher employment in all locations. In this case, inhibiting overseas expansion would have negative consequences for the US economy. Or it could happen that US exports and greater US employment follow foreign affiliate activity, for example, by providing post-sales services or parts and maintenance. Again, in this case, inhibiting overseas expansion would have negative consequences for the US economy.
Our findings do not mean that certain aspects of overseas expansion never diminish similar aspects of home-country MNC activity. Quite the contrary: the spread of investment and R&D – like trade in general – is likely to reshuffle economic activity within as well as across sectors on both sides of borders. Given the multiple positive and significant relationships between increases in overseas activity and increases in jobs, sales, exports, investment, and R&D at home (summarised in Figure 1), the dispassionate public policy analyst would have to bet that the aggregate result from outward FDI by US firms is strongly positive. Conversely, if overseas operations of US MNCs were restricted or made more difficult, the overall consequences would be less activity at home, not more.
Particularly striking is the novel investigation of outward R&D by US MNCs on the US domestic economy. Public discussion is full of zero-sum apprehension – overseas R&D by US multinationals means that the US is “losing its edge”, that others may 'catch up', that US R&D jobs are “being lost” and “aren’t coming back” (National Science Foundation 2012). But the evidence presented here shows clearly that when a US MNC increases its R&D abroad, it also increases its R&D, capital expenditures, exports, sales, and employment in the US. Indeed, what is notable is the discovery that US firms that do not increase their R&D abroad do not tend to increase it at home, either."

 

"The statistical analysis of the globalisation of R&D by US MNCs is reinforced by case studies that offer practical examples showing how global R&D expenditures and operations of US MNCs may create complementary capabilities and interdependent competencies, rather than simply displacing one capability or competency from a location in the US to location abroad."


"One example is GE Healthcare’s Magnetic Resonance Imaging Laboratory team operating between the Niskayuna, New York, campus and the Munich, Germany campus. The team jointly operates four whole-body scanners that have created major innovations in magnetic resonance imaging (MRI), allowing exceptional anatomic investigation involving the brain, spine, and musculoskeletal system. The synergy between the two research centers has generated spillovers that flow back to the US. GE’s Munich labs provided the initial insights that led to 32-channel, then 64-channel, then 128-channel imaging. This research is now incorporated into the high-end premium MRI equipment that is designed and built in the US."

"It may seem counterintuitive that the creation of new offshore R&D facilities could increase the amount of R&D carried out in the US, but this is what case studies sometimes show."


"  The creation of an R&D campus in Chennai, India has allowed Caterpillar to create a 24-hour R&D cycle on engine propulsion and pollution control. The capital-intensive Caterpillar engine labs in Peoria, Illinois operate two shifts with hundreds of channels of temperature, pressure, and emissions data to map diesel performance and emissions. These streams are sent overnight to Chennai, where the data is analysed and returned to Peoria ready for the US engineers when they come to work the next morning. "

" The chief technology officer of Caterpillar points out that the cost for the engine tests would be much greater if Caterpillar instead had a third shift working in the US, making the company’s overall R&D process less efficient and leaving less room for US engineers to exercise their comparative advantage. "

"Using the growing Indian talent pool affects US operations positively by increasing the through-put and lowering the cost of the asset-intensive US test facilities. Round-the-clock interactions between Caterpillar’s Indian and US test facilities help ensure the company’s international market leadership position, while enabling headquarters to hire more US engineers."

a win

two old ball players

regardless of comparative dollar for dollar effectriveness....QE is an exceedingly blatant class based macro policy

spending out of marginal income and wealth : transfer payments out of monetized borrowed fund versus QE out of monetized funds

if its not spent its accumulated as dollar assets


a massive transfer to  wage earners even the un constrained has wealth effects when accumulated

debt reduction by households out of payments off uncle 's credit card
is like petite  QE ...no ?

of course reduction of real  debt over hang is mostly
 the work of wage inflation in the mid to long term

but now its nominal debt reduction
which if it is not combined with a household  credit trend growth rate reduction.....


place all this under the heading :

spending out of income v spending on credit

you choose

 which is better for households in the long run ?

but even if you insist on credit driven recovery
transfers
compared dollar for dollar

 at least equal QE   punch

brit debt to gdp long series and long term bond yields

cohort parade

GE :a paragon among MNCs

"  U.S. corporation, GE  has  operations in 130 nations "

" Jack Welch,  former GE CEO :


" “Ideally, you’d have every plant you own on a barge
 to move with currencies and changes in the economy.”

"GE keeps more of its profits overseas than any other U.S. company"

"By the end of 2010 , 54 percent of GE’s 287,000 employees worked abroad"

"GE PAID
 an average annual U.S. corporate income tax rate of  1.8 percent between 2002 and 2011"

". In 2010, when GE reported worldwide profits of $14.2 billion,
 it paid no U.S. corporate income tax "
" it claimed a tax benefit of $3.2 billion. "

"During the financial crisis of 2008-2009
 the federal government’s Temporary Liquidity Guarantee Program
loaned approximately $85 billion to GE Capital"

" the company’s  finance arm that accounts for roughly half of GE’s profits"

flatline follies on job markets

 

 

 

its great to be at the top

PK touches the big nerve ending..or does he ?

" back of the envelope says that GDP would be at least 2 percent higher

 and thus
   corporate profits at least 6 percent higher

                                                if  fiscal  austerity weren’t taking place."



"the modern GOP is bad for business"

but


", it’s arguably good for wealthy business leaders"

". After all, it keeps their taxes low"

" their take-home pay is probably higher
 than it would be under better economic management."

can you dig it ? i can dig it !

self assembling structures built out of their own "work force"

like a cheer leader pyramid

"A prototype of a new modular robot, with its innards exposed and its flywheel — which gives it the ability to move independently — pulled out.    small, cube-shaped robots that can flip, jump, stack and assemble themselves into larger shapes with no exterior moving parts."


"The robots, called M-Blocks, use an internal flywheel mechanism to move and stick together using magnets.
The scientists envision miniature "swarmbot" versions of the M-Blocks that self-assemble like the "liquid steel" cyborgs in the "Terminator" films"

but these are structures made of workers like ant bridges

“We want hundreds of cubes, scattered randomly across the floor, to be able to identify each other, coalesce, and autonomously transform into a chair, or a ladder, or a desk, on demand,”

FED ASSET BUILD UP

on a big divisive issue here's democracy at work : rough and tumble ......and in the event ramrod hard

connectedness from micro to macro

 

GIAP passes

an economist looks at the Meany job market bifurcation

"Franco M' constructed a  macro model with  2 different equations for wages
. One union & one non union.

The union was vertical Phiilips curve:
price increases :
 union workers got full compensation
 Non-union didn't get full compensation
and  took the real loss from the price of an import price rise
. In fact  more than took the shock because unions caused more inflation
 --- ie core inflation--
that the non unions didn't get compensated for"

"the implicit national bankruptcy of inflation" a delong poisoned dum dum

peak performance

krug on the longer run dynamics of the global open ness rate

Should Slowing Trade Growth Worry Us?

I’ve spent most of today both under pressure to get an assignment out the door and under the weather; still sniffling, but the piece has been emailed off, so a bit of time for the blog. Except I feel like taking a vacation from both the shutdown and Obamacare. So let’s talk about trade — specifically, a recent post by Gavyn Davies, “Why world trade growth has lost its mojo,” which expresses deep concern over the fact that in recent years trade hasn’t grown much faster than global GDP. He suggests that hidden protectionism may be partly to blame, and that this may have large economic costs.
So, I’m going to disagree with both propositions.

First, on the general point of the welfare gains from trade: I’m basically with Dani Rodrik here. Standard economic models do not imply huge gains from trade liberalization. You can make arguments that suggest bigger gains, but they’re highly speculative, and the credulity with which people accept dubious nonstandard arguments for big trade gains contrasts oddly with the gimlet eye cast on arguments for, say, industrial policy. You should definitely not accept estimates that every dollar of additional trade raises world GDP by 46 cents — an extremely high number — as being definitive.
But my main thought, reading Davies’s piece, was that the belief that trade must always expand much faster than output, and that there’s something wrong if it doesn’t, doesn’t stand up to careful scrutiny.
In part, this notion comes from the fact that trade has grown faster than output since 1950. However, up through about 1970 that only represented a return to levels of trade relative to output that prevailed before World War I:

On the other hand, one does see that business cycle fluctuations produce large fluctuations in trade, much bigger in percentage terms than the moves in GDP, which you might take — which Davies does take — as an indication that the “income elasticity” of trade, the percentage rise for every percent rise in GDP, is much bigger than one.
This is, I’d say, a confusion between short-term and long-term issues. Consider, instead of trade, industrial production. We know that this fluctuates much more than GDP over the business cycle, because purchases of manufactured goods slump much more in recessions than purchases of services. Over the long run, however, industrial production and GDP grow at roughly equal rates. There’s no reason trade couldn’t be the same way. In fact, one reason trade fluctuates so much in the short run is precisely because it’s dominated by manufactured goods.
To explain a rising long-term ratio of trade to GDP, we have to turn instead to structural changes in the world economy, of which the most obvious involve declining costs of trade. My view is that rapid trade growth since World War II was driven by two great waves of trade liberalization and one major technological innovation. The first wave of trade liberalization involved industrial countries, and was largely over by 1980:

The second wave involved the great opening of developing countries:

World Bank

This is still going on, but the major opening of Latin America, China, and India is already well behind us.
Finally, there’s The Box — containerization, which made the vertical disintegration of production, with separate stages carried out in far-distant nations, possible. But this too has been going on for a while.
The point is that it’s entirely reasonable to believe that the big factors driving globalization were one-time changes that are receding in the rear-view mirror, so that we should expect the share of trade in GDP to plateau — and that this doesn’t represent any kind of problem. In fact, it’s conceivable that things like rising fuel costs and automation (which makes labor costs less central) will lead to some “reshoring” of manufacturing to advanced countries, and a corresponding decline in the trade share.
Ever-growing trade relative to GDP isn’t a natural law, it’s just something that happened to result from the policies and technologies of the past few generations. We should be neither amazed nor disturbed if it stops happening.

pk dares the rogue off "show me the model " but first he shows his

"Simon Wren-Lewis is puzzled by a Ken Rogoff column that sorta-kinda defends Cameron’s austerity policies. His puzzlement, which I share, comes at several levels. But I want to focus on just one thing: Rogoff’s assertion that Britain could have faced a southern Europe-style crisis, with a loss of investor confidence driving up interest rates and plunging the economy into a deep slump.
As I’ve written before, I just don’t see how this is supposed to happen in a country with its own currency that doesn’t have a lot of foreign currency debt – especially if the country is currently in a liquidity trap, with monetary policy constrained by the zero lower bound on interest rates. You would think, given how many warnings have been issued about this possibility, that someone would have written down a simple model of the mechanics, but I have yet to see anything of the sort.

Let’s start with something like a canonical model – a model in which there’s an IS curve representing the effects of interest rates on demand, and monetary policy is described by some kind of Taylor rule. David Romer calls this the IS-MP model, and it looks something like this at a given point of time:

Here the MP curve represents the central bank’s response function for a given rate of inflation, with rates rising if output goes up a la Taylor. The flat section represents the zero lower bound.
As Romer points out in his notes, this can be reinterpreted as an open-economy model if we let capital flows be influenced by the exchange rate (most international econ types tend to think in terms of stocks rather than flows, but it doesn’t really matter here), so that a lower interest rate leads to currency depreciation. In this case the IS curve includes the effect of a weaker currency in promoting net exports.
Now suppose that investors turn on your country for some reason. This can be represented as a decline in capital inflows at any given interest rate, so that the currency depreciates. If you have a lot of foreign-currency-denominated debt, this could actually shift IS left through balance-sheet effects, as we learned in the Asian crisis. But that’s not the case for Britain; clearly, IS shifts right. If LM doesn’t shift, the interest rate will rise, but only because the loss of investor confidence is actually, through depreciation, having an expansionary effect.
We could modify this conclusion if the central bank is worried about the inflationary effect of depreciation, so that MP shifts left. In this case we could, possibly, have a contractionary effect of lost investor confidence – but the channel runs through the inflation fears of the central bank, which doesn’t seem to be at all what Rogoff or others are talking about:

Furthermore, suppose that we start in a liquidity trap. In that case monetary policy is initially tighter than the central bank would like, so that even if MP shifts left it won’t matter unless the shift is very large:

My point is that what sounds like a straightforward claim – that loss of foreign confidence causes a contractionary rise in interest rates – just doesn’t come out of anything like a standard model. If you want to claim that it will happen nonetheless, show me the model!
Now, you might argue that IS-MP is a model of the short-term interest rate, and we’re talking about long-term rates here. But long rates are largely determined by expected future short rates, so this argument doesn’t make sense unless you have some story about why short rates should rise somewhere along the way.
Furthermore, as Wren-Lewis says, even if there is somehow a squeeze on long-term bonds, why can’t the central bank just buy them up? Yes, this is “printing money” – but when you’re in a liquidity trap, that doesn’t matter. (Alternatively, you can take a consolidated view of the government and central bank balance sheets, in which case what we’re effectively doing is refinancing at the zero short-term rate.)
I know that many people find this line of argument, in which a loss of investor confidence is if anything expansionary, deeply counterintuitive. But macro, and especially liquidity trap macro, tends to be like that. So don’t give me your gut feelings; give me a coherent story about who does what, i.e. a model. I eagerly await a response."

 

MNCs pricing and forex movements

"Exchange rate moves have surprisingly small effects on prices."

 

 

" This apparent ‘disconnect’ is one of the central puzzles in international macroeconomics."

 

". If prices don’t respond sufficiently to exchange rates then neither do quantities, and the expenditure-switching role of exchange rates is diminished (see Engel 2003)."

 

" (Amiti et al. 2012),  show that  the largest exporters are also the largest importers. "

 

" exporters are hit by an exchange rate shock in their destination market, they typically face a compensating movement in the marginal costs if they are importing their intermediate inputs."

 

 

".. an appreciation of the euro relative to the US dollar, while increasing the domestic costs of European firms (in US dollars), typically reduces their euro costs of international sourcing of intermediate inputs"

 

"empirically, the movements in the value of a country's currency are correlated across its trade partners. This natural hedging from exchange rate movements, inherent in the imports of intermediate inputs, reduces the need for exporters to adjust their export market prices

 

"Using Belgian firm-level data....t exporters that import a large share of their inputs pass on a much smaller share of the exchange rate shock to export prices."

 

 

" import-intensive firms typically have high export market shares, and hence set high mark-ups and actively move them to offset the effects of changes in their marginal cost on export prices,\

providing a second channel that limits the pass-through of exchange rate shocks"

 

" a typical small exporter with no imported inputs has a nearly complete pass-through,"

 

" large import-intensive exporter has a pass-through just above 50%,at an annual horizon¹"

 

" this large cross-sectional variation in pass-through is accounted for roughly equally

 by the two mechanisms:

 the offsetting movements in both

the mark-up

and

 the marginal cost by means of imported inputs"

 

". These two mechanisms reinforce each other and help insulate the international prices of major exporters from the economic conditions in their domestic market  limiting the expenditure-switching role of exchange rates."

----------------------------------------------------------------------------------------

"An interesting new stylised fact to emerge from this  analysis:
 large systematic differences across exporters."

" Previous studies have emphasised the differences between exporters and non-exporters, highlighting that exporters are bigger, more productive, and pay a wage premium,
. However, even within the select group of firms that are exporters there are very large differences between high import-intensity exporters and low import-intensity exporters."

" Splitting the sample based on the median import intensity:
 import-intensive exporters are 2.5 times larger in terms of employment than exporters with low import intensity"
" and an order of magnitude larger than non-exporters."

" Similar rankings are present for measured productivity, material costs, and wages, as well as extensive and intensive margins of imports and exports. These patterns are illustrated in Table 1."

 

Table 1 Exporting firms with high and low import intensity

 

	Exporters		Non-exporters
	High import intensity	Low import intensity
Share of total imports in total cost	36.8%	17.3%	1.6%
Share of non-euro imports in total cost	16.6%	1.2%	0.3%
Employment (# full-time equiv. workers)	270.9	112.1	20.7
Material cost (millions of euros)	103.5	28.1	3.0
Average wage bill per worker (thousands of euros)	48.8	42.3	34.9
Export value (millions of euros)	49.6	9.4	—
Import value (millions of euros)	49.3	6.9	—
— outside Eurozone	20.8	0.5	—

" these patterns are central in explaining the heterogeneity of exchange rate pass-through into export prices across firms."

" Furthermore, because import-intensive firms are also the largest exporters, these results help to explain the low aggregate pass-through."

•  firm market share and import intensity are the two key determinants of pass-through in the cross-section of firms within a given industry and export market, explaining a wide range of variation in exchange rate pass-through.

"imports from within the Eurozone have little effect on pass-through."

 

"the lowest pass-through rate, 61%, is found for the firms with both market share and import intensity above the respective medians. These patterns are robust to alternative cuts of the data and additional controls²."
 

Table 2 Pass-through by import-intensity and market-share bins

	Low import intensity	High import intensity
Low market share
Pass-through coefficient	0.89	0.85
Fraction of observations	30.3%	20.0%
Share in export value	8.8%	9.3%
High market share
Pass-through coefficient	0.77	0.61
Fraction of observations	19.9%	30.1%
Share in export value	21.2%	60.7%

 

•  decomposing the incomplete pass-through into the marginal cost channel and mark-up channel,  the two channels contribute roughly equally to the variation in pass-through across firms.

"the implications differ if incomplete pass-through is due to different distributions of mark-ups across firms or if it is due to the complex global sourcing patterns" which directly affect marginal costs. "

"Firms with large market shares adjust their mark-ups more than small firms do in response to cost shocks.

• Finally, these results have implications for aggregate pass-through;.

Because of the positive correlation between import intensity and market share, most of the observations lie along the diagonal in Table 2 (30% in each diagonal bin and only around 20% in the off-diagonal bins). Interestingly, while the ‘high import intensity-high market share’ bin contains 30% of the observations, those firms account for more than 60% of the value of exports. Given that these are the lowest pass-through firms, this suggests low aggregate pass-through. Indeed, a large share of exports is that of the bigger firms which source their inputs globally and are thus only partially linked to the domestic market conditions in their home country. As a result, these firms are effectively hedged against exchange rate fluctuations and do not need to fully adjust their prices. Furthermore, these are the strong market-power firms, setting high mark-ups and actively varying them to accommodate for cost shocks.

 

 

--------------------------------------------------------------------------------------------------------

"The prices of the largest firms, accounting for their disproportionate share of trade, are insulated from exchange rate movements both through the hedging effect of imported inputs and through active offsetting mark-up adjustment in response to cost shocks."

 

" Both forces limit the expenditure-switching effect of a given exchange rate movement, but have very different implications for the allocative efficiency of global production. "

" the international competitiveness effects of a euro devaluation are likely to turn out to be modest given the extensive international sourcing by major exporters"

 

". In addition, a weaker euro is likely to have limited effects on prices and quantities, with the changes largely reflected in the profit margins of major exporters."

landlords score in recovery

" Since mid-2009, nominal personal income has increased 17%. "

"Rental income has soared 85%"

" dividends are up 44%."

 "Rental  income and dividends compromise less than 10% of all income"

" have accounted for 25% of the increase in all earnings so far in the recovery"

". Following close behind is proprietors’ income, up about 42%."


"Wages and salaries, about half of all household earnings, have grown about 14%"


.
.
..

• Housing,
• Income

does yellen still think like this ?..... read these yellen mental shit slides from '96

"Clearly, we have an economy operating at a level where we need to be nervous about rising inflation, even abstracting from supply side shocks."


" We can't dismiss the possibility that compensation growth will drift upward, raising core inflation and in turn inflationary expectations."


"This is a major risk. Obviously, we need to be vigilant in scrutinizing the data for signs of rising wages and salaries. "


"I would endorse the opportunistic strategy... "


"I see an opportunistic strategy as one that would not consciously use monetary policy to push the economy below potential in order to achieve a reduction in inflation,"

" unless inflation initially were significantly far from its optimal value...."


" I would see an opportunistic strategy as one that would
 look for gains on the inflation front during periods when
  negative shocks unavoidably create slack in the economy."

comparative bounce backs

gravity equation a formula as dumb as quantity equation

pk once again on the verge of a brave new macronomicon

Bubbles, Regulation, and Secular Stagnation

"Looking at current macroeconomic policy, the obvious question is, stupid or evil? And the obvious answer is, why do we have to choose?
But it is, I think worthwhile – or at any rate soothing – to think about the longer-term future for monetary and fiscal policy. I recently talked about some of these issues with Adair Turner, and I thought I might write up my version of the story so far (just to be clear, Adair bears no responsibility for any errors or confusion in what follows). In brief, there is a case for believing that the problem of maintaining adequate aggregate demand is going to be very persistent – that we may face something like the “secular stagnation” many economists feared after World War II.

So, let’s start with the basic role of monetary policy in stabilizing the economy. Many, probably most macroeconomists – or at any rate those who think at all about policy – think of that role something like this:

Figure 1: Normal monetary policy

Here IS shows how overall real spending and hence the level of real GDP depends on the real interest rate. We think of the central bank as being able to set the real interest rate; its goal is to set that rate at a level that keeps the economy near potential output, which in turn is consistent with low and stable inflation. This is equivalent conceptually to setting the rate at the Wicksellian natural interest rate.
Not that long ago, macroeconomists were congratulating central bankers (and central bankers were, of course, congratulating themselves) over doing a pretty good job of getting this right. Inflation, occasional commodity shocks aside, was indeed low and stable, and from 1985 to 2007 the real economy was fairly stable too.

Figure 2: Inflation was good …

Then came catastrophe – and as so often happens, when the house collapses you find the skeletons that were lurking in the closet all along. The stability of prices and output masked an underlying unsustainable growth in leverage:

Figure 3: … but trouble was brewing. Household liabilities as percent of GDP.

It was a Minsky moment waiting to happen, and happen it did.
When the Minsky moment came, there was a rush to deleverage; this drove down overall demand for any given interest rate, and made the Wicksellian natural rate substantially negative, pushing us into a liquidity trap:

Figure 4: The liquidity trap.

This meant that monetary policy could no longer do the job of stabilizing the economy: Central banks found themselves up against the zero lower bound. Fiscal policy could and should have helped, and automatic stabilizers did help mitigate the slump. But fiscal discourse went completely off the rails, and overall we had unprecedented austerity when we should have had stimulus.
So we’ve had an economic disaster – and our inability to avoid this disaster makes a mockery of all the self-congratulation of the years that preceded it.
But how should pre-2008 policy have been different? And what should policy look like looking forward?
There are many economic commentators who take rising leverage, asset bubbles and all that as prima facie evidence that monetary policy was too loose; some argue that the Fed kept rates too low for too long after the 2001 recession, some argue that interest rates were too low over the whole period from 1985 to 2007.
The trouble with this line of argument is that if monetary policy is assigned the task of discouraging people from excessive borrowing, it can’t pursue full employment and price stability, which are also worthy goals (as well as being the Fed’s legally binding mandate). Specifically, since the US economy shows no signs of having been overheated on average from 1985 to 2007, the argument that the Fed should nonetheless have set higher rates is an argument that the Fed should have kept the real economy persistently depressed, and unemployment persistently high – and also run the risk of deflation – in order to keep borrowers and lenders from making bad decisions. That’s quite a demand.
Many of us would therefore argue that the right answer isn’t tighter money but tighter regulation: higher capital ratios for banks, limits on risky lending, but also perhaps limits for borrowers too, such as maximum loan-to-value ratios on housing and restrictions on second mortgages. This would guard against bubbles and excessive leverage, while leaving monetary policy free to pursue conventional goals.
Or would it?
Our current episode of deleveraging will eventually end, which will shift the IS curve back to the right. But if we have effective financial regulation, as we should, it won’t shift all the way back to where it was before the crisis. Or to put it in plainer English, during the good old days demand was supported by an ever-growing burden of private debt, which we neither can nor should expect to resume; as a result, demand is going to be lower even once the crisis fades.
And here’s the worrisome thing: what if it turns out that we need ever-growing debt to stay out of a liquidity trap? What if the economy looks like Figure 4 even after deleveraging is over? Then what?
This is not a new fear: worries about secular stagnation, about a persistent shortfall of demand even at low interest rates, were very widespread just after World War II. At the time, those fears proved unfounded. But they weren’t irrational, and second time could be the charm.
Bear in mind that interest rates were actually pretty low even during the era of rising leverage, and got worryingly close to zero after the 2001 recession and even, you might say, after the 90-91 recession (there was talk of a liquidity trap even then). It’s not hard to believe that liquidity traps could become common, if not the norm, in an economy in which prudential action, public and private, has brought the era of rising leverage to an end.
And in that case, then what?
We might try to figure out why we seem to need leverage and bubbles to have full employment, and try to fix it. More thoughts on that on another day. But what if that isn’t an option?
One answer could be a higher inflation target, so that the real interest rate can go more negative. I’m for it! But you do have to wonder how effective that low real interest rate can be if we’re simultaneously limiting leverage.
Another answer could be sustained, deficit-financed fiscal stimulus. But, you say, this would lead to exploding public debt! Actually, no – not if the real interest rate is persistently below the economy’s growth rate, which it will certainly be if it’s persistently negative. In that case the government can run a primary deficit even while keeping the debt-GDP ratio constant – and the higher the level of debt, the higher the allowable deficit.
OK, I’m shooting from the hip here. The main point is simply that the weirdness of our current situation may well go on much longer than anyone currently imagines"

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NAWRU : fraud science

yup

Spain's job markets have  a figmentary  structural problem

equal to at least 10% of the job force
thanx to gonzo NAWRU estimates a go go

five charts to snailville

1. The sluggish recovery
The recovery has been incredibly slow compared to other economic downturns. As the Center on Budget and Policy Priorities explains with this chart, the employment is only a little bit better than keeping up with population growth. The recovery has also been largely made up of low-wage jobs, and part-time or temporary work.

2. The industries that were hardest hit

The recession didn’t come equally to all parts of the economy. Not only did African-Americans and men both experience a bigger drop in employment than the general population, but some industries — most notably the construction industry — were particularly hard-hit:

3. The government recession

While most parts of the economy are now firmly on the upswing, the same can’t be said for one group of workers: Public sector employees. Continuous budget cuts in the midst of the recession, combined with the particularly devastating across-the-board cuts precipitated by sequestration, government workers (who include teachers, firefighters, park rangers, state and local level workers, and those in Washington, DC) have been floundering. Previous recoveries have benefited from growth in the public sector, but not this time:

4. Anti-recovery budget cuts

It might seem counter-intuitive to cut government budgets during a recession, but that’s been a key platform of the Republican party. This chart from the Wall Street Journal demonstrates what the employment situation would look like without budget cuts:

5. Not out of the woods

Dodd-Frank, financial regulation law created in the wake of the recession, is meant to prevent a similarly devastating bank-driven recession from happening again. But as this chart demonstrates, Wall Street had a heavy hand in the creation of the law, participating in far more meetings than any other group.


As President Obama said on Sunday, “we’re not near where we need to be” on recovering from the Great Recession. Reasons to worry pile up. Despite rhetoric agains the “too big to fail” mentality, banks remain much too large to collapse. In fact, the largest US banks are even bigger than they were five years ago, when the recession began.