BRIEFLY NOTED: For 2021-03-27 Sa

Things that went whizzing by that I want to remember...

Very Briefly Noted:


Three Paragraphs:

1) The bare monetarist model—that the only relevant commodities were (outside) money on the one hand and currently-produced goods-and-services on the other, and that the only shocks were shocks to (outside) money supply and money demand—was always, obviously inadequate. And it always seemed to me that the bare IS-LM model—that the only relevant commodities were (outside) money on one hand; currently-produced goods-and-services on another hand; and (safe) bonds on the third hand—always seemed to me greatly inadequate as well: it needed not just price expectations, price adjustment, and a labor market, but also risk as well. Indeed, what happens with capital inflows depends on whether those capital inflows are accompanied by risk-bearing capacity when they flow in, or not:

Olivier Blanchard, Jonathan D. Ostry, Atish R. Ghosh, & Marcos Chamon (2015): Macro Effects of Capital Inflows: Capital Type Matters: ‘Expansionary or contractionary effects of capital inflows: It depends what kind: Some scholars view capital inflows as contractionary, but many policymakers view them as expansionary. Evidence supports the policymakers. This column introduces an analytic framework that knits together the two views. For a given policy rate, bond inflows lead to currency appreciation and are contractionary, while non-bond inflows lead to an appreciation but also to a decrease in the cost of borrowing, and thus may be expansionary…

LINK: <>

2) I don’t think this is right: Republicans have never—never—been opposed to social insurance for the right kind of people. Subsidies for “job creators” have always been golden. Subsidies for hard-workers who play by the rules have also always been golden. But programs that give money to African-Americans? No. And programs that give money to the wrong kind of people, usually ethnics—featherbedding unionized workers, elderly who spent their money on drink and did not save because they lack the American thrift, the wrong kinds of public employees with too much book-learning who are too clever and aclien? Nope as well.

The line between the “worthy” who are deserving of subsidy and the “unworthy” has, however, always been shifting and contestable. Which ethnics are good hard workers? Which are overly-clever, lazy, and alien? What kind of economic shocks and catastrophes are no fault of your own? What kinds of economic shocks and catastrophes are things that the lazy should have insured themselves against ex ante, and because they did not it is important now to hold up their poverty as an example?

In a semi-democracy, Republican politicians need to convince not a majority but a plurality that they are among the elect—worthwhile “job creators“ and “hard workers“. As the Republican electorate has aged, Medicare has shifted in Republican mythology from being a program for the leeches to a program for the worthy. But to call this “more moderate” is, I think, to mistake what is going on:

Matthew Yglesias: Is Asymmetrical Polarization Real?: ‘The GOP is both crazier than the Democratic Party and also acting crazier than it did in the recent past…. But this increasingly loopy version of the Republican Party is also mostly more moderate on policy than the Bush-era incarnation…. On Medicare… Obama used to argue with Paul Ryan about whether the program needed small cuts (the left view) or huge cuts and privatization (the right view). Now, the debate ranges from no changes to Medicare for All, with Trump again positioned to Obama’s left…. When liberals freak out about the GOP these days, they’re mostly not talking about policy…. It’s not like Trump invaded a medium-sized country on false pretenses, ran a global network of secret torture prisons, or was caught running a huge illegal surveillance program…. The flipside of all this is that today’s Republicans seem dangerous and authoritarian.,,, After he lost the election, he and many other Republican Party leaders told people the election had been illegally stolen and encouraged a mob to gather, which eventually stormed the Capitol building. The part of this that created a literal threat to the lives of congressional Republicans did provoke a fair amount of intra-party criticism, but ultimately the vast majority of his party opted for impunity. When Trump’s misconduct didn’t affect them personally, they mostly supported it. Chris Hayes’ headline “The Republican Party is Radicalizing Against Democracy” is pretty dramatic, but I don’t think he’s wrong…. Liberals find Trump so abhorrent that they generally refuse to recognize that the Trump-era GOP decisively pivoted to the center to ameliorate huge electoral vulnerabilities on several key issues. Democrats probably don’t need to do anything as drastic…. They probably don’t even need to pander to immigrant-hating racists as much as Obama did. But you can pander a little!…

LINK: <>

3) This has been our world all our lives:

Jody Rosen: ’In a 1991 commencement address, George H.W. Bush decried “political correctness.” Among the examples of “political correctness [on] campuses” cited by the NYT: “At Harvard, two students who hung a Confederate flag out a dormitory window were denounced by black students.”… Cancel culture scam is decades old, the rhetoric hasn’t changed, and none of the catastrophes forecast by hucksters—from the purging of Homer and Shakespeare to the collapse of the First Amendment—have come to pass…. Notably in that same U of Michigan commencement speech President Bush conflated “PC” with Johnson’s Great Society anti-poverty push. Culture war baloney, full of racist doublespeak, serving an agenda of deregulation, austerity, and war on the poor. Plus ca change… LINK: <>

Share Grasping Reality Newsletter, by Brad DeLong

Hoisted from the Archives:

2015Musings on the Current Episteme of the Federal Reserve…: Larry Summers attributes the Federal Reserve’s decision to tighten policy, in what appears to him and to me to be a weakly-growing and high-slack economy, to four mistakes, which are themselves driven by a fifth, overarching mistake. The four mistakes are: (1) The Fed has much too much confidence in its models that tell it that the unemployment rate takes the temperature of the labor market and the Phillips Curve now still has the slope it had in the 1970s. (2) The Fed operates as though FOMC members are tased whenever inflation rises above 2%/year, with no countervailing painful consequences of low inflation, low employment, or low output. (3) The Fed believes—without empirical support anywhere that I can see—that quick sharp moves up or down in interest rates have larger effects in total than the same interest-rate change made gradually and over a longer term. (4) The Fed thinks—without theoretical support that I can see–that zero interest rates are not a reflection of an economy in a pathological state, but rather a cause of economic pathology that is dangerous now that the economy is once again “normal”.

And Summers sees the fifth, overarching mistake the Fed is making right now as: (5) The Fed is excessively committed to “existing models and modes of thought… in the thrall of orthodoxy”: 

Why is the Fed making these mistakes if indeed they are mistakes? It is not because its leaders are not thoughtful or open minded or concerned with growth and employment. Rather I suspect it is because of an excessive commitment to existing models and modes of thought…

I do think—confidently—that Summers is absolutely 100% correct in his identification of the four component intellectual errors that the Federal Reserve is currently making. And it is certainly true that these are the result of an excessive commitment to some current modes of thought—there are, after all, a lot of people who join the Fed in thinking that zero interest rates are a cause rather than the proper treatment of pathology right now, that the Fed needs to raise rates now to give it the space to lower them if need be later, that it is dangerous for inflation to rise above 2%/year ever, that the Phillips Curve somehow has a steeper slope than the recent evidence of the past generation can justify belief in, and that the unemployment rate rather than the detrended employment-to-population ratio gives the temperature of the labor market.

But do these beliefs on the part of the Fed really reflect an excessive commitment to existing models? There I have my doubts. Or, rather, it depends on what you think the proper function of economic modeling is. Are models properly idea-generating machines, in which you start from what you think is the case and use the model-building process to generate new insights? Or are models merely filing systems–ways of organizing your beliefs, and whenever you find that your model is leading you to a surprising conclusion that you find distasteful the proper response is to ignore the model, or to tweak it to make the distasteful conclusion go away?

Both can be effectively critiqued. Models-as-discovery-mechanisms suffer from the Polya-Robertson problem: It involves replacing what he calls “plausible reasoning”, where models are there to assist thinking, with what he calls “demonstrative reasoning”. in which the model itself becomes the object of analysis. The box that is the model is well described but, as Dennis Robertson warned,there is no reason to think that the box contains anything real. Models-as-filing-systems are often used like a drunk uses a lamp post: more for support than illumination.

In the real world, it is, of course, the case that models are both: both filing systems and discovery mechanisms. Coherent and productive thought is, as the late John Rawls used to say, always a process of reflective equilibrium—in which the trinity of assumptions, modes of reasoning, and conclusions are all three revised and adjusted under the requirement of coherence until a maximum level of comfort with all three is reached. The question is always one of balance.

But it is clear to me that if you give even minor weight to the first—see well-founded models as a way of generating new insights rather than just organizing old beliefs—that the line of work into the economics of the liquidity trap that I see as well-represented by Krugman’s (1999) “Thinking About the Liquidity Trap” tells us, very strongly, that the Federal Reserve is on the wrong track intellectually right now. It tells us that what is out of whack has not been and is not the real money stock, but is instead the expected inflation rate. Or, rather, that because the expected inflation rate is too low, there is no value of the real money stock consistent with full employment equilibrium. If expected inflation were higher, the existing money stock would be ample, or even require shrinking.

This is the conclusion of Krugman (1999): that the economy needs higher expected and actual inflation, and that the free-market economy with full price flexibility would deliver that inflation. But the Fed does not appear to acknowledge either that the economy needs higher inflation, that the flexible-price benchmark would deliver this inflation, or that the job of the Fed is to mimic that full employment-generating price structure as closely as possible.

Moreover, the Fed does not engage in reflective equilibrium. It rejects the conclusions of what I regard as the standard Patinkin-style existing model of Krugman (1999). But it does not propose an alternative model. There seems to me to be no theoretical ground, no model even considered as a filing system, underpinning the “orthodox” modes of thought that the Fed believes. And it does not seem to feel this absence is a problem. 

I find that lack of faith in the usefulness of our tools… disturbing… 

LINK: <>

Leave a comment