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Monetary & Housing Policy Thread: Fed Adopts Evans Rule

I'm looking for the long history of incompetence at fighting inflation...

fredgraph.png
 
TuffaloDeac10 said:
BUMP to discuss Merkley's plan
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Doesn't seem feasible or safe, but it's not like I've done an extensive analysis of it. This organization will start right off the bat with negative equity and huge cash flow problems. Even if bondholders are willing to put up the capital for the project at reasonable interest rates, which is highly unlikely, there is literally no way for the organization to keep up with payments. Any gains from the mortgages have already been sacrificed to the banks in order to get them to refinance. At the end of the day, the difference will have to be made up by the taxpayer, or the bondholders will be wiped out. Given the scale of the asset purchases he is proposing, this would be devastating to the financial system. And this isn't even taking into account the possibility of default, which is still likely for subprime debtors, even at lower rates.
 
TR1982 said:
Doesn't seem feasible or safe, but it's not like I've done an extensive analysis of it. This organization will start right off the bat with negative equity and huge cash flow problems. Even if bondholders are willing to put up the capital for the project at reasonable interest rates, which is highly unlikely[SUP]1[/SUP], there is literally no way for the organization to keep up with payments[SUP]2[/SUP]. Any gains from the mortgages have already been sacrificed to the banks in order to get them to refinance. At the end of the day, the difference will have to be made up by the taxpayer, or the bondholders will be wiped out. Given the scale of the asset purchases he is proposing, this would be devastating to the financial system. And this isn't even taking into account the possibility of default, which is still likely for subprime debtors, even at lower rates.
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1 Why is this so? The federal government borrows at ~0% today. This is, after all, a proposal for a federal government agency/project.

2 I think the ~4% (15 year) and ~5% (30 year) spreads would be good enough, that's a bigger spread than most banks are getting on new loans right now.
 
TR1982 said:
That's only if you accept Keynesian theory from the outset. Also, if basic Keynesian theory were correct, given the size of the expansionary measures taken, the recovery should have been much sharper, regardless of the severity of the recession[SUP]1[/SUP].

Nothing, really[SUP]2[/SUP], but then again I kind of have a problem with economy-wide models[SUP]3[/SUP]. They are pedagogically useful, but their explanatory powers are weak[SUP]2[/SUP], and they often make for horrible policy prescriptions[SUP]3[/SUP]. It's easy to say, "Ah! Aggregate demand has fallen, we must shift the LM curve to the right in order to make up for output[SUP]4[/SUP]. But grouping the entire loanable funds market together and failing to understand the nuanced outcomes that can occur when you rapidly expand the money supply leads to unintended consequences. See: Phillips Curve
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1 If Keynesian theory is correct, we're still in a liquidity trap. I don't think the size of the stimulus was very big. China's was ~600bn (between 11 and 15ths) for a country with a nominal GDP a little less than one half of ours (please note that this is an argument regarding the size of the stimulus, not the propriety of a country with almost double digit real GDP growth, China, needing stimulus). And the Fed's balance sheet isn't composed of the type of assets (i.e. not Treasuries) that pushes us out of said liquidity trap and it's not like it's led to the currency having a massive depreciation like some other countries recently (Iceland comes to mind) or during the Great Depression.

2 So you can't think of anything that does a better job than IS-LM does explaining the liquidity trap and Little Depression we're in, but are convinced that its explanatory powers are weak? Is it doing a bad job of describing our situation and everything else, including microfounded neoclassical DSGE models, are just worse crap? Are you for real or being nakedly partisan again?

3 The Phillips curve disaster of the 1970s is the only one I can think of. And I don't think the 1970s were as bad as the Great Depression, which was a failure of Say's Law, domestic laissez-faire, trade wars, and hard money, basically everything Keynes didn't like. And so we have the one success of the right-wing or right-leaning Lucas paradigm against aggregated conceptions, while we're sitting here with 8% unemployment that would almost certainly be higher if not for TARP and other government interventions that loons from Chicago have broadly opposed. Bravo. But here's my problem, the General Theory is more or less microfounded. Keynes discusses the individual's marginal propensity to consume, the functioning of the financial markets and confidence of investment and the marginal efficiency of capital. Those things are the basis of the economy-wide models that came out of the General Theory. It's not like IS-LM might be a spurious correlation between inflation and unemployment. It just doesn't have microfoundations that happen to be easily put into the type of computer models that are fashionable with macroeconomists today. Are there problems with Keynes' descriptions of individual actors? The Phillips Curve basically "failed" because people attempting to exploit the relationship between inflation and employment didn't consider how producers would react to their own costs rising once they came to expect inflation. But I fail to see how that connects to the IS-LM's prescriptions for liquidity traps.

4 Am I supposed to take you seriously? Deficit spending pushes the IS curve to the right. Moving the LM curve to the right would just mean a bigger liquidity trap, if you can conceive of such a thing

100911krugman2-blog480.jpg
 
If you are so convinced we are in a liquidity trap then why do you keep telling us that the Fed needs to enact another round of quantitative easing? Am I supposed to take you seriously?
 
Or massive currency devaluation, but that's really just a mild form of trade war. Maybe we could convince China to unload some of their Treasuries, as there seems to be plenty of demand out there and China selling would be like us selling dollars.
 
TuffaloDeac10 said:
Unconventional easing. I think I've been clear about that
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Unconventional in what way? The easing we've been undertaking has already been unconventional. We've practically cleared the market of mortgage-backed securities in an attempt to push down mortgage rates. That's in addition to the federal funds rate already being zero. The economy isn't faltering for lack of action by the Fed.
 
TR1982 said:
Unconventional in what way? The easing we've been undertaking has already been unconventional. We've practically cleared the market of mortgage-backed securities in an attempt to push down mortgage rates. That's in addition to the federal funds rate already being zero. The economy isn't faltering for lack of action by the Fed.
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There's a lot of ways to be unconventional. We could debase the currency to boost exports through more favorable exchange rates, buy more state/local bonds, have the Fed solve the Eurozone crisis itself, etc etc. It could announce that it would accept higher inflation in the face of declining unemployment and increased commuting pressures on energy prices and upward pressure on rents. It could promise not to take the punch bowl away. There's still a lot the Fed can do, it just seems to lack the will.

I harp on the Fed as much as I do because it can still act, Congress is utterly useless right now so there's not much point discussing fiscal stimulus (which I would prefer).

More here and here

http://www.nytimes.com/2012/04/29/m...-bernanke.html?pagewanted=1&_r=2&ref=magazine

http://www.nextnewdeal.net/rortybomb/what-constrains-federal-reserve-interview-joseph-gagnon
 
TuffaloDeac10 said:
There's a lot of ways to be unconventional. We could debase the currency to boost exports through more favorable exchange rates, buy more state/local bonds, have the Fed solve the Eurozone crisis itself, etc etc. It could announce that it would accept higher inflation in the face of declining unemployment and increased commuting pressures on energy prices and upward pressure on rents. It could promise not to take the punch bowl away. There's still a lot the Fed can do, it just seems to lack the will.

I harp on the Fed as much as I do because it can still act, Congress is utterly useless right now so there's not much point discussing fiscal stimulus (which I would prefer).

More here and here

http://www.nytimes.com/2012/04/29/m...-bernanke.html?pagewanted=1&_r=2&ref=magazine

http://www.nextnewdeal.net/rortybomb/what-constrains-federal-reserve-interview-joseph-gagnon
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None of these things are guaranteed to work, and they all carry considerable risks, especially a higher target inflation rate. The logic behind allowing a faster rate of inflation is the same logic behind the Phillips Curve. It's astounding to me that people still advocate such a policy. Krugman argues that higher inflation will encourage people to spend faster. This could be true, but it could also just encourage people to shift their savings to riskier investments. It will push up long term interests rates, which will harm the economy, and it will hurt consumers. Krugman has been staring at data series too long, and has forgotten that often times it's better to just use common sense. Most people don't have money to just spend. It's not like they are just sitting on a bunch of cash and are just waiting for prices to go up to give them an incentive to spend it. Most people are riddled with debt. The only thing a higher target inflation rate will do is punish savers who are just trying to make it to retirement.

The problem with the Fed trying to fix the economy is that changes in the money supply only have a short term effect on the real economy, but they have long-term effects on nominal economy, which, in general is why the dual mandate is ridiculous. Despite Krugman's many statements to the contrary, Bernanke understands this, which is why he advocated such strong action by Japan in the '90s, but has done little since the financial crisis. There has been no inconsistency on his part. Japan was experiencing a severe liquidity shortage and at several points declining prices. This is something that the Bank of Japan could have done something about, but zero-interest rates were not strong enough to counteract the deflationary pressures and expand the credit markets. This is why Bernanke suggested that the Bank of Japan should have taken alternative measures. Not because of Japanese unemployment, which wasn't even that bad. At its highest, their unemployment rate reached about 5.5%.

Our economy, on the other hand, is not facing such deflationary pressures or defunct loanable funds markets. Monetary ineptitude is not what is keeping the economy in the doldrums. The thing I find most ironic is that Krugman intimates that Bernanke is wilting under political pressure. But let's be honest, Krugman has political motives for urging such strong action himself. He is a brilliant economist, but he's also a hack. He has demonstrated willingness to change his opinion solely based on who is in office. In 2003, he was sounding the alarms about how huge budget deficits would cause the bond market to call B.S. on the federal government, leading to soaring interest rates. These days, he has shown no such concern about the deficit, and indeed, has advocated for the massive expansion of the deficit. Why the inconsistency? So he could lend his economic credibility to a condemnation of the Iraq War.
 
TR1982 said:
None of these things are guaranteed to work, and they all carry considerable risks, especially a higher target inflation rate[SUP]1[/SUP]. The logic behind allowing a faster rate of inflation is the same logic behind the Phillips Curve. It's astounding to me that people still advocate such a policy[SUP]2[/SUP]. Krugman argues that higher inflation will encourage people to spend faster. This could be true, but it could also just encourage people to shift their savings to riskier investments. It will push up long term interests rates, which will harm the economy, and it will hurt consumers. Krugman has been staring at data series too long, and has forgotten that often times it's better to just use common sense. Most people don't have money to just spend. It's not like they are just sitting on a bunch of cash and are just waiting for prices to go up to give them an incentive to spend it. Most people are riddled with debt. The only thing a higher target inflation rate will do is punish savers who are just trying to make it to retirement[SUP]3[/SUP].

The problem with the Fed trying to fix the economy is that changes in the money supply only have a short term effect on the real economy, but they have long-term effects on nominal economy, which, in general is why the dual mandate is ridiculous. Despite Krugman's many statements to the contrary, Bernanke understands this, which is why he advocated such strong action by Japan in the '90s, but has done little since the financial crisis. There has been no inconsistency on his part. Japan was experiencing a severe liquidity shortage and at several points declining prices. This is something that the Bank of Japan could have done something about, but zero-interest rates were not strong enough to counteract the deflationary pressures and expand the credit markets. This is why Bernanke suggested that the Bank of Japan should have taken alternative measures. Not because of Japanese unemployment, which wasn't even that bad. At its highest, their unemployment rate reached about 5.5%[SUP]4[/SUP].

Our economy, on the other hand, is not facing such deflationary pressures or defunct loanable funds markets. Monetary ineptitude is not what is keeping the economy in the doldrums. The thing I find most ironic is that Krugman intimates that Bernanke is wilting under political pressure[SUP]5[/SUP]. But let's be honest, Krugman has political motives for urging such strong action himself. He is a brilliant economist, but he's also a hack. He has demonstrated willingness to change his opinion solely based on who is in office. In 2003, he was sounding the alarms about how huge budget deficits would cause the bond market to call B.S. on the federal government, leading to soaring interest rates. These days, he has shown no such concern about the deficit, and indeed, has advocated for the massive expansion of the deficit. Why the inconsistency?[SUP]6[/SUP] So he could lend his economic credibility to a condemnation of the Iraq War.[SUP]7[/SUP]
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1 If we confined ourselves to things guaranteed to work, we'd live in a pretty shitty world. If you're saying that it would be nice to have more natural experiments to look at than we currently do, I agree. But it seems we're (both US and much of the world) in an unenviable position of being the natural experiment, unless we want to say that we're in the Great Depression pt 2 or the Little Depression and need massive fiscal stimulus and/or currency devaluations to restore demand and reduce debt burdens on debtors (this is what I want to say, obviously). We might as well make the most of it, and I suspect we will, one way (my ways) or the other (your's/Paul Ryan's ways, although there's a lotta Sneaky Keynesian policies in the tax cut/delayed spending cut plans). Of course there's also the chance that there's no decisive action one way or the other and we just stay in our Little Depression for the next decade or so. :/

2 Sure, but just because the Phillips Curve breaks down when policymakers try to exploit it doesn't mean there aren't trade-offs between employment/output and inflation in the short-run. Obviously I don't think an exogenous positive employment shock is coming on its own, but let's say one does, we'd then have a demand shock and upward pressure on wages, housing, commodity, and other prices. The Phillips Curve fails as a policy tool because announced inflation affects expectations of costs as well as revenues. I don't think the central bank saying it would accept the inflationary pressures of new hiring is the same as saying that it's going to create inflation itself and expects producers to hire, or else. I also expect that since many unions are profoundly weaker now than in the 1970s, that the Phillips Curve today is a lot flatter than the 1960s-early70s and the inflationary pressures might not be so great. Again, I think this specific action (Bernanke saying he'd be ok with inflation going above target after being below target for so long) is pretty passive.

3 Feels like a good spot to post this, which I enjoyed reading.

4 Sure, but Japan was running a current account surplus through it's 18 year long Lost Decade. I'm not sure we'd have our unemployment problem if we had their current account surplus. And I think there's plenty of room for upward distortions in the nominal economy, based on how far below long-run trend we are. I don't think this drop and lack of catch-up growth is due to a drop in productivity or a contraction of the PPF.

fredgraph.png


5 A major US political party with a ~40% chance of winning the Presidency just announced a commodity basket bug (this really lacks the punch of "Gold bug") for VP. Bernanke got drilled by Republican lawmakers last time he went before the JEC, there was hardly a peep from the Democrats. I mean Jim DeMint basically came out and advocated for expansionary austerity in one of his questions. We're living in a world where Peter Schiff has authored a Top 1000 book on Amazon overall* and the #1 selling public finance book (also outselling End This Depression Now!). This is nuts. There's political pressure on the Fed, alright, but it's not from my side.

6 Because Keynesian stimulus measures are necessarily short-run and a ten-year tax cut with set to expire in an election year is semi-permanent (tax stickiness, if you would). We used to have government surpluses as far as the eye could see and the Bush tax cuts and wars of political convenience were oddly-timed and oddly-chosen ways to end the era of Clinton-Gingrich surpluses and Krugman thought the bond vigilantes would be PO'ed. Seems like a reasonable prediction to make about the future actions of bondholders. When that prediction isn't born out, and we have bondholders across the globe fleeing to safety (~2008 to present), it makes sense to think we're not in immediate danger. "When the facts change, I change my mind" and all that.

7 If only more people had lent whatever credibility they had to stop that war

*The Top 1000 is apparently volatile, Schiff's book moved from the 900s to 1400s in one day.
 
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TuffaloDeac10 said:
We need to stop talking about Iraq before someone comes over and derails our thread. Deal?
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Agreed. Give me a few hours to respond to your post. I don't have enough time to post long responses right now.
 
TuffaloDeac10 said:
1 If we confined ourselves to things guaranteed to work, we'd live in a pretty shitty world. If you're saying that it would be nice to have more natural experiments to look at than we currently do, I agree. But it seems we're (both US and much of the world) in an unenviable position of being the natural experiment, unless we want to say that we're in the Great Depression pt 2 or the Little Depression and need massive fiscal stimulus and/or currency devaluations to restore demand and reduce debt burdens on debtors (this is what I want to say, obviously). We might as well make the most of it, and I suspect we will, one way (my ways) or the other (your's/Paul Ryan's ways, although there's a lotta Sneaky Keynesian policies in the tax cut/delayed spending cut plans)[SUP]1[/SUP]. Of course there's also the chance that there's no decisive action one way or the other and we just stay in our Little Depression for the next decade or so. :/

2 Sure, but just because the Phillips Curve breaks down when policymakers try to exploit it doesn't mean there aren't trade-offs between employment/output and inflation in the short-run.[SUP]2[/SUP] Obviously I don't think an exogenous positive employment shock is coming on its own, but let's say one does, we'd then have a demand shock and upward pressure on wages, housing, commodity, and other prices.[SUP]3[/SUP]The Phillips Curve fails as a policy tool because announced inflation affects expectations of costs as well as revenues. I don't think the central bank saying it would accept the inflationary pressures of new hiring is the same as saying that it's going to create inflation itself and expects producers to hire, or else. I also expect that since many unions are profoundly weaker now than in the 1970s, that the Phillips Curve today is a lot flatter than the 1960s-early70s and the inflationary pressures might not be so great. Again, I think this specific action (Bernanke saying he'd be ok with inflation going above target after being below target for so long) is pretty passive.

3 Feels like a good spot to post this, which I enjoyed reading.[SUP]4[/SUP]

4 Sure, but Japan was running a current account surplus through it's 18 year long Lost Decade. I'm not sure we'd have our unemployment problem if we had their current account surplus. And I think there's plenty of room for upward distortions in the nominal economy, based on how far below long-run trend we are. I don't think this drop and lack of catch-up growth is due to a drop in productivity or a contraction of the PPF.[SUP]5[/SUP]

fredgraph.png


5 A major US political party with a ~40% chance of winning the Presidency just announced a commodity basket bug (this really lacks the punch of "Gold bug") for VP. Bernanke got drilled by Republican lawmakers last time he went before the JEC, there was hardly a peep from the Democrats. I mean Jim DeMint basically came out and advocated for expansionary austerity in one of his questions. We're living in a world where Peter Schiff has authored a Top 1000 book on Amazon overall* and the #1 selling public finance book (also outselling End This Depression Now!). This is nuts. There's political pressure on the Fed, alright, but it's not from my side.[SUP]6[/SUP]

6 Because Keynesian stimulus measures are necessarily short-run and a ten-year tax cut with set to expire in an election year is semi-permanent (tax stickiness, if you would).[SUP]7[/SUP] We used to have government surpluses as far as the eye could see and the Bush tax cuts and wars of political convenience were oddly-timed and oddly-chosen ways to end the era of Clinton-Gingrich surpluses and Krugman thought the bond vigilantes would be PO'ed. Seems like a reasonable prediction to make about the future actions of bondholders. When that prediction isn't born out, and we have bondholders across the globe fleeing to safety (~2008 to present), it makes sense to think we're not in immediate danger. "When the facts change, I change my mind" and all that.

7 If only more people had lent whatever credibility they had to stop that war

*The Top 1000 is apparently volatile, Schiff's book moved from the 900s to 1400s in one day.
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Sorry it took so long to respond to this. I had a huge response typed out, and then I lost it.

1. I'm not sure where you got the impression that I totally reject the works of Keynes. He was undoubtedly the most important economist of the 20th century. In fact, I would describe myself as a New Keynesian, in the mold of a Greg Mankiw or Ken Rogoff. The problem is with economics in general. Politicians have decided that what they think is right, and then they go searching for economists to substantiate their views. More often than not, these economists are perfectly willing to oblige. They will distort the facts and the data to arrive at the conclusion they want, no matter how tortured their logic is. Rejecting the arguments of Krugman, Stiglitz, and Eggertsson isn't the same as rejecting the works of Keynes.

I have expressed reservations about the construction of economy-wide models, wherein economists simply plug in exogenous changes, and determine the outcome based on what the model says. Unfortunately, substantial liberties are taken in the construction of these models, and assumptions are made that are not remembered later on down the road when comparative statics are performed. Keynes did not do this so much. He described short-term incentives and causal relationships, but it was only Hicks who turned this into an economy-wide model.

2. Of course it means that there isn't a trade-off. A trade-off implies a perfect causal relationship. The causal relationship between employment and inflation is far, far, far less than perfect. In fact, the Phillips Curve ignores the single greatest factor in inflation, the money supply.

3. You're right, an exogenous employment shock isn't coming, because employment is an endogenous variable. If you are going to treat it as an exogenous variable, you have to account for which actual exogenous variables changed to bring about the positive employment shock, and then determine what effects that those variables will have on the rest of the economy, and inflation in particular. Again, this cutting of corners is another huge problem in the modern macroeconomic discipline.

And you don't think the Federal Reserve is accepting the inflationary pressures of new hiring right now? Where are interest rates right now? The Federal Reserve is encouraging these pressures. You might be right if there were any indications that the Fed would immediately respond to 4% inflation with a policy rule change, but the Fed has announced over and over again that they aren't raising rates until at least 2014. If anything, the low interest rates are hampering employment, because they are encouraging businesses to invest in physical capital at low cost rather than labor.

4. I don't even know where to start with this study. Actually, I do. It's with the obvious weak link, the idea of the "paradox of toil" first proposed by Eggertsson, never shown empirically, and now accepted as the linchpin of Krugman's whole argument. I read Eggertsson's original study proposing the paradox of toil a while back, and, to my shock, it relied on convoluted logic that made no sense in the short run. Basically, what they are saying is that when interest rates reach the zero lower bound, the entire economy turns on its head an normal incentives don't apply anymore. It's comical, to say the least. What was most offensive about it, was that Eggertsson actually suggested that this "paradox of toil" was the natural counterpart to the paradox of thrift.

The paradox of thrift applies in all macroeconomic situations, and makes sense as an intuitive cause-and-effect response to decreased demand. The "paradox of toil" makes no sense intuitively, applies only in a special case, and uses four to five interlinked causal relationships. This is an example of economists torturing theory to make it say what they want if I have ever seen one. There is absolutely no evidence to back up Eggertsson's claim, and yet Krugman seems gleefully willing to toss the entire economic discipline out the door to reach the conclusion that he wants to reach.

5. So what? Their current account surplus is more than offset by the lack of domestic demand. If their current account surplus was really the reason for their low unemployment, then we'd have seen higher levels of growth during the Lost Decade.

6. Who's in the White House? I rest my case. I guarantee you that Bernanke is feeling more pressure from the Administration than he is from Congressional Republicans.

7. Necessarily short-run? Spending has increased from around 20% of GDP to around 25% of GDP from 2008 to 2012. That's four years, and if that isn't traversing into the realm of the long-run, then huge deficits for the next two years will push us there. Four years is more than enough time for businesses to adjust their capital allocation strategies accordingly.
 
TR1982 said:
Sorry it took so long to respond to this. I had a huge response typed out, and then I lost it.

1. I'm not sure where you got the impression that I totally reject the works of Keynes[SUP]1[/SUP]. He was undoubtedly the most important economist of the 20th century. In fact, I would describe myself as a New Keynesian, in the mold of a Greg Mankiw or Ken Rogoff. The problem is with economics in general. Politicians have decided that what they think is right, and then they go searching for economists to substantiate their views. More often than not, these economists are perfectly willing to oblige. They will distort the facts and the data to arrive at the conclusion they want, no matter how tortured their logic is[SUP]2[/SUP]. Rejecting the arguments of Krugman, Stiglitz, and Eggertsson isn't the same as rejecting the works of Keynes.

I have expressed reservations about the construction of economy-wide models, wherein economists simply plug in exogenous changes, and determine the outcome based on what the model says. Unfortunately, substantial liberties are taken in the construction of these models, and assumptions are made that are not remembered later on down the road when comparative statics are performed. Keynes did not do this so much. He described short-term incentives and causal relationships, but it was only Hicks who turned this into an economy-wide model.

2. Of course it means that there isn't a trade-off. A trade-off implies a perfect causal relationship. The causal relationship between employment and inflation is far, far, far less than perfect. In fact, the Phillips Curve ignores the single greatest factor in inflation, the money supply[SUP]3[/SUP].

3. You're right, an exogenous employment shock isn't coming, because employment is an endogenous variable. If you are going to treat it as an exogenous variable, you have to account for which actual exogenous variables changed to bring about the positive employment shock, and then determine what effects that those variables will have on the rest of the economy, and inflation in particular. Again, this cutting of corners is another huge problem in the modern macroeconomic discipline.

And you don't think the Federal Reserve is accepting the inflationary pressures of new hiring right now? Where are interest rates right now? The Federal Reserve is encouraging these pressures. You might be right if there were any indications that the Fed would immediately respond to 4% inflation with a policy rule change, but the Fed has announced over and over again that they aren't raising rates until at least 2014[SUP]4[/SUP]. If anything, the low interest rates are hampering employment, because they are encouraging businesses to invest in physical capital at low cost rather than labor[SUP]5[/SUP].

4. I don't even know where to start with this study. Actually, I do. It's with the obvious weak link, the idea of the "paradox of toil" first proposed by Eggertsson, never shown empirically, and now accepted as the linchpin of Krugman's whole argument [SUP]6[/SUP]. I read Eggertsson's original study proposing the paradox of toil a while back, and, to my shock, it relied on convoluted logic that made no sense in the short run. Basically, what they are saying is that when interest rates reach the zero lower bound, the entire economy turns on its head an normal incentives don't apply anymore. It's comical, to say the least. What was most offensive about it, was that Eggertsson actually suggested that this "paradox of toil" was the natural counterpart to the paradox of thrift.

The paradox of thrift applies in all macroeconomic situations, and makes sense as an intuitive cause-and-effect response to decreased demand. The "paradox of toil" makes no sense intuitively, applies only in a special case, and uses four to five interlinked causal relationships. This is an example of economists torturing theory to make it say what they want if I have ever seen one. There is absolutely no evidence to back up Eggertsson's claim, and yet Krugman seems gleefully willing to toss the entire economic discipline out the door to reach the conclusion that he wants to reach.

5. So what? Their current account surplus is more than offset by the lack of domestic demand. If their current account surplus was really the reason for their low unemployment, then we'd have seen higher levels of growth during the Lost Decade.

6. Who's in the White House? I rest my case. I guarantee you that Bernanke is feeling more pressure from the Administration than he is from Congressional Republicans[SUP]7[/SUP].

7. Necessarily short-run? Spending has increased from around 20% of GDP to around 25% of GDP from 2008 to 2012. That's four years, and if that isn't traversing into the realm of the long-run, then huge deficits for the next two years will push us there. Four years is more than enough time for businesses to adjust their capital allocation strategies accordingly[SUP]8[/SUP].
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1 From "That guy is quite the hardcore Keynesian," (point of order, Kimball describes himself as a "neo-Monetarist," whatever that might be) "That's only if you accept Keynesian theory from the outset. Also, if basic Keynesian theory were correct," and "Pure Keynesian theory is obnoxious." If the impression taken from those quotes is incorrect, I'll discard it.

2 Yes, it's quite a bane for the science. See here, here, and here. But let's not be too harsh on Mankiw, he did write this, which sounds good to me.

3 This is a monstrous lie. There is just about no relationship between the change in the money supply and the change in the CPI in the short term.

fredgraph.png


The quarterly change in M2 money has a -.05 correlation coefficient with inflation. If we think price setters take a while to adjust to the money supply, lagging the change in money supply one quarter produces a -.089 correlation. This is not a convincing case that printing -> inflation.

fredgraph.png


Likewise, there is almost no relationship whatsoever between the change in M1 and the inflation rate (-.01 correlation). I don't know who told you that the money supply is the greatest factor in inflation, but I'd suggest never listening to that person again. I mean, that idea is just wrong, except for Zimbabwe or other similarly insane situations. There's nothing to support it in the United States' case and there's no excuse for holding it, as it totally ignores the lesson of price instability under the Gold Standard. Inflation is determined by demand pushing up against the limits of supply. Right now we don't have demand stressing supply, and so we don't have inflation even with a ton of money (more reason to assume we haven't had enough stimulus). In the 1990s we have a big rise in productivity, and therefore supply, that coincided with a period of high demand and so we didn't have bad inflation. Score one for economy-wide models like AD-LRAS. That's a hell of a lot more explanatory and predictive power than assuming that the money supply determines inflation. Also check out the charts on the fourth page of this report.

I mean, why do you think Volcker's recessions were necessary to break the inflation fever? He didn't destroy any M1 money and the M2 series only starts in November 1980 so I can't see any changes. The recessions squelched demand and hence inflation/inflation expectations. Once the expectations were dead he could allow demand to pick up again, with relatively smooth growth in the money supply.

4 Because [drumroll], the Fed expects the shitty conditions to last until late 2014.

5 Two points. One, someone is being paid to build that capital. And two...

6 This is the paradox of toil in action. The capital substitutions push out AS and do nothing to restore AD, assuming, reasonably, that the capital substitution is being undertaken because it is cheaper than hiring new workers (the worker in the previous point is cheaper than the new hire). The way to restore demand is by stimulating demand, not by fiddling with aggregate supply. And that's exactly how the paradox of toil is intuitive, a collapse in demand got us into this Little Depression and demand will need to be re-inflated in order to get us out.

7 The President doesn't control the Fed's independence, Congress does. The President has hardly uttered a peep about the Fed, meanwhile the House GOP is doing its damnedest to audit the Fed, the GOP is going to put a plank in the platform about exploring reviving the Gold Standard, and it's VP nominee takes his monetary policy from some crank in a romance novel who was apparently a pretty disagreeable guest at someone's wedding reception. We're going to have to agree to disagree here, given that you hold your view without a shred of publicly-available evidence to support it.

8 You asked why I preferred spending increases to tax cuts. I believe that spending is less sticky than tax rates are and would end more quickly once demand is restored, so I support spending as the stimulative measure. The fact that our deficits haven't been big enough doesn't change that.
 
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