German History and the Greek Crisis

Puzzled by the widespread pretense that the Eurogroup negotiations broke down because Greece had refused to accept further austerity I looked up the final Greek proposal. Peter Spiegal explained the state of play 3 long days ago

Athens’ final counterproposal to its trio of bailout monitors would re-impose many of the large-scale corporate taxes and pension contributions that creditors demanded be stripped out amid concern it would plunge Greece into a deeper recession.

According to a copy, distributed to eurozone finance ministers Thursday and obtained by the Financial Times, Athens has stuck with its demand for a one-time 12 per cent tax on all corporate profits above €500,000, a measure the government estimates will raise nearly €1.4bn by the end of next year.

In addition, it would raise employer contributions to Greece’s main pension fund by 3.9 per cent and would more slowly implement measures to raise the country’s retirement age to 67 and “replace” rather than phase out a special “solidarity grant” to poorer pensioners.

We have posted a copy of the Greek counterproposal here.

Greece’s bailout creditors – the International Monetary Fund, European Central Bank and European Commission – eliminated the one-time profits tax and the increase in employer contributions to the pension system in their offer to Athens yesterday, arguing that such heavy levies on companies would severely hit economic growth. It also pushed for more aggressive timeline for raising the retirement age and cutting the special top-up for poorer pensioners.

Still, the Greek plans contain some key concessions from the original proposal submitted by Alexis Tsipras, the Greek prime minister, to creditors in an offer made on Monday. Although legislation raising the retirement age would not be implemented until the end of October – creditors want it to kick in immediately – it accepts the 67-year retirement age should be hit by 2022. Originally, Athens was proposing 2025.

So no further austerity, oh except for the 67-year retirement age.

A very key sticking point was the proposed one-time 12 per cent tax on all corporate profits above €500,000. I can understand why an Italians and French might not be familiar with the idea of a one off tax effectively on capital used to deal with a fiscal crisis. But, there were Germans involved. Germany has been there and done that.

How did Germany end its hyperinflation ?

Let's ask the Wikipedia

The newly created Rentenmark replaced the old Papiermark. Because of the economic crisis in Germany after World War I, there was no gold available to back the currency. Luther thus used Helfferich's idea of a currency backed by real goods. The new currency was backed by the land used for agriculture and business. This was mortgaged to the tune of 3.2 billion Goldmark, based on the 1913 wealth charge called Wehrbeitrag which had helped fund the German war effort in World War I.

This land is your land, this land is my land, this land is backing for the Rentenmaaaaaaark

Germany found itself in fiscal (and other difficulties) even after 1923 and again turned to a capital levy [pdf warning] This wassn't the very next capital levy to occur in Germany but I will skip one -- Goodwin's law and all that)

After World War II, in 1949, a capital levy was raised

on the asset base from 1948. It was conclusively

regulated as part of the burden-sharing legislation

(Lastenausgleich) in 1952.[9]

9 S. Bach, “Lastenausgleich aus heutiger Sicht: Renaissance der allgemeinen Vermögensbesteuerung?” Vierteljahrshefte zur Wirtschaftsforschung des DIW Berlin, no. 80, (2011): 132.

Now Germans who remember German history might reject the Syriza proposal as much too little much too late compared to the bold willingness to seize capital to serve the common good demonstrated by Schacht, Luther, Helfferich, Schaffer, Erhard, and Adenauer. However, it is very odd that they argue that a one off tax on wealth must cause an even deeper depression, when their own country's history demonstrates that such policy has been immediately preceded a wirtschaftswunder.

Washington Post and New York Times on the Greek Crisis

The crisis so far. Negotiations at the Eurogroup of finance ministers between Greek finance minister Yanis Varoufakis and the other 18 broke down when the Greek government announced a referendum next Sunday on whether to accept the June 25th proposal of the institutions formerly known as the Troika. The European Central Bank (ECB) decided to take the radical step of not changing the emergency liquidity assistance (ELA) program. This means sticking with the ceiling on emergency liquidity set Friday June 26th which was about 1.2 billion Euros of bank withdrawals ago. As a result, the Greek government declared a week long bank holiday with ATM withdrawals limited to 60 Euros a day. The radical non expansion of ELA shows that Greece can't really use the Euro as a normal currency unless it reaches agreement with the ECB (one of the institutions formerly known as the Troika). The Tsipras government will advise Greeks to vote no on the referendum, but polls suggest Greeks will vote yes, and the bank holiday will not make them less desperately eager to make any promise necessary to get a temporary bailout.

There are a number of very good explainers at The Washington Post and The New York Times. I do think that they all leave out one key point. The Greek government made an alternative proposal for austerity in exchange for a loan. The other 18 rejected this proposal saying that the deficit reduction (which excluding interest is a surplus increase) had to be based on pension cuts not higher taxes on employers. Their argument was based on dynamic scoring/supply side economics/right wing ideology. Some might suspect that the true motivation was a desire to not reach agreement, cause a crisis and show Greeks and especially Spaniards that it is unwise to elect leftists.

update:[don't miss the very shocking update at the end of the post] OK starting at the top, Neil Irwin's post at The Upshot is excellent. I question only the following passage

Greek leaders think the offer on the table from European governments and the International Monetary Fund is lousy, requiring still more pension cuts and tax increases in a depressed economy, and intend to throw to voters the question of whether to accept it.

The statement is true, but it leaves out the fact that Greek leaders offered a different plan including smaller pension cuts and different and larger tax increases which was rejected by the other 18 European governments. The dead lock is no longer over the question of whether there shall be additional Greek austerity but over the form of that austerity. Now it may be odd that a radical leftist government proposed inflicting further grinding austerity on a depressed economy when that approach has utterly failed so far. But this is what happened. In practice the Greek authorities caved and declared their willingness to do the opposite of what they promised to do during the election campaign. Given where we are now, the Greek proposal is irrelevant. But it is worth mentioning how we got here.

Still at the Times Jim Yardley wrote a front page news article. Again I think it is very clear and much more worth reading than this blog post. An amazing amount of information is packed into the article. I do think a mention of the Greek proposal could have been added roughly here

The referendum was a surprise move by Mr. Tsipras, announced early Saturday, as he declared that voters should decide whether to accept the terms of the creditors’ latest aid proposal — terms he considers onerous.

Greece’s creditors — the other 18 eurozone countries, the European Central Bank and the International Monetary Fund — in effect cut off negotiations with Mr. Tsipras after he called for the referendum,

Now Michael Birnbaum at the Washington Post

Negotiations over Greece’s future have been dragging for months. The disagreements are about the extent of the painful reforms it must make to continue receiving the rescue funds that keep the nation’s finances afloat. But talks came to a halt Saturday after Tsipras announced he would hold a referendum on July 5 to ask Greeks whether they would accede to the austerity demands of the nation’s creditors. Greek leaders have urged their citizens to vote no.

This is not exactly accurate -- the extent of austerity in the Greek proposal and in the Institutions proposal is roughly the same. the deadlock is over tax increases versus pension cuts. Also "reforms" is a charged word -- there is an automatic guess that reforms are improvements. Since the agreed type of further reforms is more of the policy which has been followed by a 25% decline in GDP, this presumption should not be encouraged. In particular "painful reforms" suggests short term pain for long term gain. This is the sincere belief of the heads of the institutions formerly known as the troika. However it is not supported by evidence and is hard to reconcile with either recent data or data from the 30s and 40s. I almost typed of "experts" at the institutions, but I think it is fairly clear that head IMF economist O J Blanchard disagrees. (so, by the way, does Neil Irwin see above).

I think the three articles suffer to different extents from the fact that Greek leaders did not stick with their role as radical leftist rejectors of austerity. The nature of the Eurogroup debate changed radically last week when the Greeks attempted to surrender.

This is history now, but I think there is some value in remembering the distant past of last week. The evidence that European leaders who together have a veto are unwilling to compromise at all with Greece is useful to anyone trying to predict the medium run future.

very shocking update: Paul Krugman too

That’s why successive Greek governments have acceded to austerity demands, and why even Syriza, the ruling leftist coalition, was willing to accept the austerity that has already been imposed. All it asked for was, in effect, a standstill on further austerity.

Krugman also advises Greeks to vote no. He is certainly opposed to further austerity and he is not inclined to Ballance. In fact, I learned of the outrageous antics of the Troika from him here "the creditors keep rejecting Greek proposals on the grounds that they rely too much on taxes and not enough on spending cuts."

Forgetting where I first read that and considering DeLong's two rules regarding Krugman, I checked to make sure that Greece had indeed proposed further austerity. Greece definitely proposed further tax increases and pension cuts.

Among the key sticking points

Athens has stuck with its demand for a one-time 12 per cent tax on all corporate profits above €500,000, a measure the government estimates will raise nearly €1.4bn by the end of next year

In addition, it would raise employer contributions to Greece’s main pension fund by 3.9 per cent

[skip]

Greece’s bailout creditors – the International Monetary Fund, European Central Bank and European Commission – eliminated the one-time profits tax and the increase in employer contributions to the pension system in their offer to Athens yesterday, arguing that such heavy levies on companies would severely hit economic growth.

So a debtor country was (and maybe still is) insisting on raising taxes and its creditors won't let it. I think the institutions formerly known as the Troika might as well have said that they must reject the proposal because they are "but a committee for managing the common affairs of the whole bourgeoisie."

What We Learn By Contrasting the Impacts of Greek and Puerto Rican Default

Don't you hate it when you have a great title and no post to go with it. Greece today v Puerto Rico today non post inspired by

Presumably the US government won’t react to a Puerto Rican default by kicking it off the dollar.

— Matt! (@mattyglesias) June 29, 2015

I'm pretty sure this non-post is a quotation of Daniel Davies, but I can't find the link.

Alas Ellas loses ELA

Breaking news The European Central Bank announced an end to Emergency Liquidity Assistance to Greece.

This would have been the Troika's enforcement mechanism punishing Greek default, but Greece hasn't even defaulted yet.

update: never mind maybe given Reuters V BBC clash of the titans

ECB considering increasing haircut on security offered by Greek banks for ELA while keeping assistance - Reuters

https://twitter.com/CNBCWorld/status/615102469115387904

Also @Frances_Coppola With anything from EU sources, unless the source is named you should not believe it.

https://twitter.com/Frances_Coppola/status/615103021803020288

end update update 2: Robert @Peston provided a link to the ECB press release. I don't entirely understand what sticking to the June 26 ceiling implies. http://www.ecb.europa.eu/press/pr/date/2015/html/pr150628.en.html Robert Peston explains

The European Central Bank is expected to end emergency lending to Greece's banks on Sunday, the BBC understands.

The country's banks depend on the ECB's Emergency Liquidity Assistance (ELA). Its governing council is meeting later. Greece will probably have to "announce a bank holiday on Monday, pending the introduction of capital controls", a source told the BBC's Robert Peston.

The bailout for heavily indebted Greece expires on Tuesday and talks have broken down. Greek banks would find themselves in serious straits as soon as Monday if the ECB went ahead and cut the lifeline, the BBC economics editor says.

Capital controls are restrictions on how much customers can withdraw from banks. Until now, the Greek government has signalled that it does not want to impose such controls.

In recent weeks, Greeks have withdrawn billions of euros from banks, and long queues formed at cashpoints on Saturday, amid fears that banks would not open on Monday.

The ECB has been sending emergency funds on a daily basis to the Greek central bank, which then allocates it to the high-street banks.

This is the way in which Grepudiation of debt would lead to Grexit. Greek banks can't operate using Euros if the Greek central bank runs out of Euros. The Greek Central Bank can't call cyber-Euros from the vasty deep (Tartaros) but must ask for them to be sent from Frankfurt.

I guess it is theoretically possible for Greek banks to operate without a lender of last resort (such things were done for decades in my native USA). It would be necessary for Greek depositors to trust that things will work out. This hope is chimerical and as likely as a flying horse. Given Greeks' rational total lack of confidence in Greek banks, the banks need a lender of last resort with unlimited resources. I think that means the Greek central bank must control a fiat currency, that is, Greece must leave the Euro. I think that, without ELA, the only alternative would be to abandone banking and conduct all transactions in cash with paper Euro notes.

I think that if ELA is not reintroduced (say if Greece concedes entirely to the Troika demands) then it will be necessary to convert Euro denominated assets (including checking account balances) into Drachma denominated assets using some exchange rate. Also whatever this rate is, a Euro will immediately cost more Drachmas on the market. This means that it is wise for Greeks to take all the money they can out of banks and hold it as cash. This means that the Greek banking system can't survive function using Euros.

In Two Polls a plurality of Greeks say they would vote to accept the Troika Proposal

According to greekreporter.com

In a poll conducted by Alco for the Greek newspaper ‘Proto Thema’, 57% of the participants said they would vote yes in the upcoming referendum, favoring a deal.

Another poll conducted by Kapa Research for ‘To Vima’ found that 47% of the population will vote yes approving the agreement, while 33% will vote ‘NO.’

According to the referendum, voters will be asked to respond to the following question: “Greek people are hereby asked to decide whether they accept a draft agreement document submitted by the European Commission, the European Central Bank and the International Monetary Fund, at the Eurogroup meeting held on June 25.”

I am very surprised. Prime minister Alexis Tsipras called for the referendum (which has been approved by parliament) and advised Greeks to vote no. I just assumed that he had good reason to expect to win the referendum -- that he had internal polls or something.

I don't know what happened so I will speculate. It is possible that Tsipras is surprised too. It is also possible that he guessed (and guesses) that Greeks will vote yes. Finding himself in the minority in a referendum is preferable to finding himself with the confidence of a minority of parliament. If the referendum is held and a plurality vote yes, then it would be extremely unwise to vote no confidence in Tsipras because he obeyed the instructions of the people. Earlier, I argued that Tsipras can't just concede the the Troika proposal. But he can if voters tell him too. It is conceivable that he wants to concede (to the troika) and this is his strategy. Finally, it is even possible that he is being fully honest. He promised an end to austerity without Grexit. He might feel that he wasn't delegated the authority to decide which promise to keep, so he should ask the people. You know Democracy -- another one of those crazy Greek ideas.

It isn't clear to me that, even given these polls, Greece will make it to the July 5th referendum without defaulting. They owe a payment to the IMF due Tuesday June 30th. The Eurogroup must release some rescue money by Tuesday to prevent default. I think it certain that at least finance minister (cough Schauble cough) will oppose this. For the Eurogroup to cause default before a referendum in which polls suggest the people will accept the Troika's current bargaining proposal would be for it to prove that a blocking coalition of non Greeks is determined to achieve Grexit (presumably to make an example of Greece to scare the Spaniards). This would be moderately politically costly. I doubt that such proof would be very costly given public opinion about Greece and Greeks in important European countries Germany.

I won't try to guess if the one week loan to allow time for Greeks to say uncle will be extended. I also have no idea if the IMF has any flexibility which would allow it to ignore the eventuality that the Greek payment is a week late but not a Euro short.

I now must recognise that I have no idea what is going to happen. update: The alco poll with 57% didn't ask about the deal offered by the troika. According to the AP

"In the poll by Alco for the Proto Thema Sunday paper, 57 percent said they believed Greece should make a deal with its EU partners while 29 percent wanted a rupture."

This is not the question Greeks will answer in the referendum on July 5th which refers specifically to the deal offered to Greece on June 25th.

The Greek Crisis and Referendum

Greek Prime Minister Alexis Tsipras called for a referendum in which Greeks could vote to accept or reject the demands for further austerity made by Greece's creditors **. This seems to me to guarantee Greek default and imply that no agreement on debt rescheduling will be reached. I have no expertise at all -- I am writing as a newspaper reader. I will assume that the reader knows about as much as I do. update 2: Francesco Saraceno wrote this post but much better here. update 4: Wait a minute, in one Alco poll a 57% of Greek respondents say they would vote yes in the referendum accepting the Troika's proposal. In a Kapa poll 47% say they would vote yes 33% say they would vote no. Given these polls it seems very possible that the proposal (which was rejected by Tsipras) would be approved by referendum. This can only happen if Greece is given a bit of relief to delay default from the currently scheduled June 30 until after the July 5 referendum. It seems to me that a refusal to make a one week loan would make it clear that a blocking coalition of Non Greeks is determined to cause Grexit. Such a refusal would prevent Greece from accepting the current proposal from the troika. I am totally surprised. I think I have to write a whole new post. end update. I think this Washington Post article by Griff Witte is a very good explanation of the current situation

Both sides say that an agreement is now extremely unlikely.

“The negotiations are clearly ended, if I understand Mr. Tsipras correctly,” said German Finance Minister Wolfgang Schäuble as the continent’s top finance officials gathered for their fifth emergency meeting in the past two weeks. “We have no grounds for further discussions.”

The first question is whether either is bluffing. Until Tsipras called for a referendum, I had guessed that there would be an agreement which would prevent default/kick the can down the road. I now guess that there won't be an agreement.

I don't see how a Tsipras government could survive if he were to try to accept the creditors' demands and calls off the referendum. Calling a referendum as a bluff would be a crazy bluff, but the key point is that he is just Prime Minister and doesn't have the authority to fold*. At the same time, calling a referendum violates the norms of international negotiations which require that the general public is kept out of it except, perhaps, for approving the final agreement (with minor amendments and a second vote scheduled if they vote the wrong way the first time). If the European Finance ministers/Troika grant concessions in exchange for cancellation of the referendum, they will have to do something similar in all future negotations. This might be in the interest of the European Union, but it would be too humiliating and infuriating.

Greece doesn't have the cash to meet a payment to the IMF required on Tuesday June 30th. The referendum is scheduled for July 5th (so Greeks won't have a chance to declare independence from the Unitet States of Europe on the 4th of July). This is really at least as soon as it can practically be managed. Some concession must be made to prevent default.

I think this is acceptable to Greece's negotiating partners (very especially including Shäuble). Last week Greece made major concessions and the creditor replied with extreme demands that the primary surplus be increased by spending cuts not tax increases. This sure seems to indicate a desire to get to no.

So what happens next ? A key issue and key cost of default for Greece is that the European Central Bank (ECB) has been loaning and loaning to Greek banks as Greeks take out their Euros while they can. It is entirely possible that Greek banks won't be able to open Monday. A default (scheduled for Tuesday) would almost certainly cause the ECB to cease to help Greek banks. It seems likely that Greece faces at least a banking holiday. This would cause great suffering directly and further decline of production.

I think at that point, Greece is much better off reintroducing the Drachma and declaring that references to the Euros in contracts are to be replaced with references to (some initial exchange rate) drachmas. The cost to Greece of Grexit would have been a financial crisis. If they have a financial crisis Monday anyway, they might as well regain monetary independence and devalue. I don't see any point in Greece promising to pay its debts to official creditors in Drachmas. They can't accept that (or every country with foreign currency denominated debt would redefine their debts) so simple default seems better for everyone.

My ignorant guess is that the crisis won't spill over to other countries (I'm not trying to empty my Italian bank accounts).

* update: I see that Matthew Yglesias says that Tsipras's best strategy is to fold 'em. I think that it might have been a wise move to accept the extreme undemocratic Eurodemands, but it is too late for Tsipras to do that. The question is what would happen next were Tsipras to announce that the referendum has been cancelled and he is accepting the deal. I think it very unlikely that enough Syriza MPs would accept this for the current coalition to survive. I think Tsipras would have to do a Ramsey MacDonald and try to form a unity government with the former opposition as in "the Labour government was split by demands for public spending cuts to preserve the Gold Standard. In 1931, MacDonald formed a National Government in which only two of his Labour colleagues agreed to serve and the majority of whose MPs were from the Conservatives. As a result, MacDonald was expelled from the Labour Party, which accused him of betrayal." MacDonald is still very much loathed by the few who remember who he was.

Tsipras the traitor would not be useful to the new coalition -- a leader with a history of bluffing and folding is not valuable. I don't see how a second Tsipras government could last.

I think that folding might conceivably be a good strategy for Greece, but I don't see how it could be managed. Another even grimmer historical analogy would be the Franco-Prussian war in which the French were defeated in six weeks then spent three months futily attempting to surrender.

In contrast, the experiences of countries which default isn't so horrible. I am thinking of the cased of Iceland, Russia and Argentina. Argentina didn't even entirely have its own currency. Countries considering default are threatened with terrible things, but International Finanz Kapital is not a united agent -- in practice foreign banks do business with countries which have defaulted. Default is associated with horrible economic suffering, because countries endure horrible suffering while trying to avoid default. I can think of these three cases when default was preceded by horrible recession and followed by rapid growth. I think default is the least bad remaining option for Greece. ** update 3 "(represented by the Eurogroup)" deleted -- Greece is part of the Eurogroup which (officially) therefore isn't Greece's bargaining counter party.

Brad DeLong buries the Lead in what is left of George Will's Credibility

A 16th paragraph (if I counted right) at the Washington Center for Equitable Growth blog is more prominent that a first paragraph here, but Brad has never been a stickler for restrictions on fair use, so I will steal his amazing catch. He notes George Will being sloppy then dishonest.

George F. Will is angry:

The paramount injury [from Roberts’s decision] is the court’s embrace of a duty to ratify and even facilitate lawless discretion exercised by administrative agencies…. Rolling up the sleeves of his black robe and buckling down to the business of redrafting the ACA, Roberts cites a doctrine known as “Chevron deference.”… The doctrine is that agencies charged with administering statutes are entitled to deference when they interpret ambiguous statutory language. As applied now by Roberts, Chevron deference obligates the court to ignore language that is not at all ambiguous but is inconvenient…

One problem is that George F. Will seems not to have read John Roberts’s opinion before writing. He decided to attack John Roberts for expanding the deference that the Supreme Court offers the President. But Chief Justice John Roberts says expressly that he is not – repeat NOT — deferring to the IRS in the manner of the Chevron case. He is not expanding the deference that the Supreme Court offers the President: he is, in fact, narrowing it:

John Roberts:

We often apply the two-step framework announced in Chevron…. “In extraordinary cases, however, there may be reason to hesitate before concluding that Congress has intended such an implicit delegation” [to an agency.] This is one of those cases…. Whether… credits are available on Federal Exchanges is… central to this statutory scheme…. It is especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy…. This is not a case for [deference to] the IRS. It is instead our task to determine the correct reading of Section 36B…

Because of Roberts, no future President with a different IRS can change the implementation so that tax credits flow only to state exchanges.

The honest thing for Will to have done — after he got around to reading Roberts’s opinion — would have been to pull an Emily-Litella-“never-mind” and pulled his piece.

Instead, he has tried to silently edit it — at least the version appearing in National Review Online:

George F. Will:

Rolling up the sleeves of his black robe and buckling down to the business of redrafting the ACA, Roberts cites a doctrine known asinvents a corollary to “Chevron deference.”… It says that agencies charged with administering statutes are entitled to deference when they interpret ambiguous statutory language. As applied now by Roberts, Chevron deference obligates the court to **While purporting to not apply Chevron, Roberts expands it to empower all of the executive branch to** ignore or rewrite congressional language that is not at all ambiguous but is inconvenient…

Monkeying around with Multipliers

Over in a comment thread at mainly macro, I am engaged in a long discussion with the extremely polite, erudite and smart commenter weareastrangemonkey

I am putting my latest contribution here, because it is related to a continuing debate and contains links which required a few minutes of googling

we do agree that in 2013 there was fiscal consolidation and that only part of it was sequestration. I don't really have a serious objection to the practice of calling tax increases starting January 1 2013 part of sequestration.

I think it is important that sequestration did not correspond to a change in the trend of G (federal + state + local consumption plus investment). An estimate of the G multiplier using US data from the recovery is very imprecise but it happened to be 1.64 using data through 2014q3 .

(please do click the link -- these are the data which Sumner asserts proves Keynesians wrong (partly because he uses the word "sequester" sloppily in contrast to you)).

To the small extent that this is evidence of anything, it very much supports the ex ante guess of around 1.5 made by Krugman, C Romer and a whole bunch of Keynesians.

Prof Wren-Lewis does not accept the grudging relative praise, but I note that new as opposed to old Keynesian models imply that the correct fiscal variable is G not any sort of deficit. It is notably the fiscal variable Krugman discussed in his theory post on optimal fiscal policy in a liquidity trap http://krugman.blogs.nytimes.com/2008/12/29/optimal-fiscal-policy-in-a-liquidity-trap-ultra-wonkish/ (note the date).

However there were tax increases 2 months before sequestration. I am an ultra paleo Keynesian and I admit that they were not followed by the change I would have expected

I also note that this is a calculation with one data point (one payroll tax increase).

Overall considering overall US government consumption plus investment and Federal government taxes and transfers, the data look Keynesian, in spite of that one data point (which definitely stands out from the scatter)

After rereading this post from 2009, I decide that I actually like it and think it is still relevant.

http://angrybearblog.com/2009/02/what-remains-of-keynesian-revolution.html

I do have to make a few corrections

1) investment should be I not i (oops missed the shift key)

2) my concession that Milton Friedman had a valid critique of 1960s era Keynesians is based on widely accepted but bogus intellectual history as argued at length by James Forder http://www.economics.ox.ac.uk/Academic/james-forder in, among other things, a book.

3) P.C.B Phillips is not the son of William Phillips

Paul's first letter to the blogospherians 13:13

The Priority of Clarity

.

Though I write with the tools of Lagrange and Bellman, and have not clarity,

I am blowing my own horn with a changing symbol.

And though I have the gift of forecasting, and understand all theorems, and all knowledge;

and though I have all math, so that I could prove existance, and have not clarity, I am nothing.

And though I bestow clever words to read with the proof, and though I give manuscripts to be printed,

and have not clarity, it profits men nothing.

.

The Qualities of clarity

.

Clarity suffers long facing facts; clarity fudges not; clarity vaunts not itself, is not puffed up,

Does not behave itself vaguely, seeks not her own, is not easily proven, keeps a record of errors;

Rejoices not in equivocations, but rejoices in the proof;

Bears all things, believes few things, hopes all things, endures their absense.

.

The Permanence of Math

.

Math never fails: but whether there be forecasts, they shall fail;

whether there be cites, they shall cease;

whether there be knowledge, it shall vanish away.

For we know in part, and we forecast in part.

But when that which is perfect is come, then that which is in part shall be done away.

When I was a student, I spoke as a student, I understood as a student, I thought as Lucas:

but when I became a man, I put away childish things.

For now we see in a class dimly; but then face to face: now I know in part;

but then shall I know even as also I am known.

And now abides math, proofs, clarity, these three; but the greatest of these is clarity.

according to the Robert James version

Costly R&D in a model of competitive equilibrium in which technology is completely non-excludable

Recently the academic discussion of whether R&D can occur if competition is perfect has spilled over into the blogosphere. The standard view is that no one will pay the cost of R&D if they don't obtain some market power from trade secrets or patents or something as a result. This is not a new view -- the only regulatory power specifically and explicitly granted to Congress in the US constitution is the ability to award patents and copyrights to encourage innovation.

The aim of this silly note is to describe an exception to this general rule. The point, if any, is to respond to the idea that we know something based on economic theory with the claim that the conclusion follows from assumptions beyond the standard core assumptions of rational utility maximization. I don't think the alleged example presented here is of any relevance to the real world -- the exercize is purely mathematical.

The idea is that investing in R&D may be rational even if the resulting technology is completely non-excludable if the technology complements a rival factor of production owned by the agent who invests in R&D. The math is simple -- the challenge is to decide if I have done violence to the meanings of "R&D", "technology" and "non-excludable".

This post is a sin. For my sins I am trying to post a note about less than, greater than etc as html. Blogger was very unhappy. Anyway, the reader is warned it is pointless (and will be warned again when it gets pointlesser).

Is it possible for rational agents to engage in costly research and development even though the resulting technology is non excludable so there can be no revenue generating ownership of it ? The answer is obviouisly yes -- rational altruistic agents may do so in order to help humanity as a whole, rational highly curious agents may do so for their own amusement. It is not obvious that rational agents who care only about consumption (or consumption and leisure) might conceivably do so.

I aim to present a model in which agents care only about consumption, in which technology is developed through labor which could otherwise be used to earn wages, in which the technology is freely available to everyone so the inventor gains nothing from the fact that she rather than someone else is the inventor, in which agents are rational utility maximizers, and in which technology advances and output grows without bound. The incentive for the production of non rival technology is that is is a complement for the inventors endowement of rival laboring capacity.

In the model there is one consumption good which is produced using labor and technology -- there is no capital. There is a continuum of workers each of which has a unique type of ability and there is a continuum of technologies. There is one unit of workers indexed by i which is a real number in the interval [0,1]. Each worker is endowed with L units of labor which she supplies inelastically so labor supplied L_i=L. Output of the homogenous non durable consumption good Y is given by equation 1

Y = integral from i=0 to 1 of L_iA_i di = L integral from i =0 to 1 of A_i di

This means that technology i can be used only by worker i. A_i is labor augmenting technology which augments only labor of worker i. It is not necessary that worker i produces exactly zero using technology j !=i . So far it is enough that worker i produces more with technology i than with technology j . Later it will be necessary that this difference is large enough and in any case I will assume that worker i can produce the good only using technology i.

The workers may be self employed or employed by competitive firms. It doesn't matter. In either case they get income w_i = A_i L. I am going to assume that L = 1 so w_i = A_i. I introduced L then set it to one for some reason which I forget. The workers can do three things with this income. They can consume it. They can, in theory, lend it to other workers, although in equilibrium all lend nothing and borrow nothing. Finally they can take it home and feed it into an R&D machine which causes some technology A_j to increase. I tell this crazy story to simplify notation. The model works the same if workers employ part of their time producing the good and part of their time researching and developing so long as the productivity of worker i as a researcher and developer is proportional to A_it like her productivity as a goods producer.

I assume worker i dedicates di to R&D. In theory worker i could devote resources to improving some technology other than technology i. Obviously they don't do this -- it would have no effect on their income ever and they care about nothing other than consumption. So by optimal choice d_it is devoted to improving technology i. The effect is

dA_it/dt = dit/eta

so eta is the cost in terms of the good of one unit of technology.

I guess that workers neither borrow nor lend so C_it = A_it - d_it , nonetheless I define a market real interest rate r_t such that they all choose this optimally.

R_t = integral from t=0 to 1 of r_t

Worker i chooses d_it and,in principal C_it to maximize

integral from t=0 to infinity of e^{-rho t} ln(C_it) dt

subject to

integral t = 0 to infinity e_^{-R_t} (C_it + d_it - A_it) dt less than or equal to 0

and

dA_t/dt = d_it/eta for all t.

It is fairly clear (as I will guess and check) that r_t = 1/eta -- in exchange for eta units of consumption good now, worker i gets a flow of one unit of income forever.

so dln(C_it)/dt = 1/eta-rho

dln(A_it)/dt = d_it/(eta A_it)

if d_it/A_it = (1-rho eta)

then dLn(A_it/dt) = dln(C_it)/dt = 1/eta-rho.

If c_it = rho eta A_it then the budget constraint trivially holds with equality and c_it grows at rate 1/eta-rho so the Euler equation holds. Finally for any i and j the ratio C_it/C_jt is constant so agents i and j can't obtain any gains from lending one to the other.

Therefore a solution to the model is for all i and t

c_it = rho eta A_it

and d_it = (1-rho eta)A_it

and there is balanced growth at rate 1/eta-rho.

It is reasonably obvious that this solution is unique.

I think this is a case of costly R&D investment in completely non-excludable technology and a model in which growth results from costly R&D even though there is perfect competition.

One might argue that the technology A_i is excludable, because it can be used only by worker i. This is not true, a firm can be set up which uses technology A_i and hires worker i and also uses other technologies and hires other workers. This makes no difference at all, since the firm will pay exactly all of the good produced by worker i to worker i. With perfect competition and constant returns to scale it doesn't matter how production is divided between firms -- each worker can be self employed or each can work for a firm which employs many workers.

Worker i has no market power. the reason is that effective labor of type i = A_iL_i is a perfect substitute for effective labor of any other type A_jL_j . If worker i threatens to quit, she doesn't scare her employer which can costlessly switch to using another technology and hire another worker. Since technology is non rival and non excludable, workers are perfect substitutes. I think that one would be foolish to argue that technology A_i is excludable, because it can be used only by worker i. However, I will present an absolutely pointless model to illustrate this claim.

------------------------------- from here on the note is even morepointless than it was above------------------------------------

Here is a totally pointless model in which a given technology augments the labor of N=10 workers not just one. It works equally well for any finite N including a trillion. The analysis is similar to that of the model I just described above with a bit more irritating notation and a continuum of identical inequality constraints to check.

There is a continuum of agents of measure 10 indexed by i which goes from 0 to 10. Agents with iless than1 inelastically supply a total of 2 units of labor, while agens with i in [1,10] supply a total of 9 units of labor. The goods may be consumed or used to finance research and development -- of course a more sensible model would have some labor devoted to goods production and some to R&D -- the odd assumption is made just to simplify notation.

there is a continuum of measure of different technologies A_j where j goes from 0 to 1. Each agent has the ability to use one and only one technology. This is a strange assumption which is key to the results. Obviously it is not realistic. Each technology can be used by 10 different agents. If i'-i is an integer, then agent i and agent i' use the same technology. define j(i)= i-floor(i).

Goods are produced by perfectly competitive firms and total output at time t Y_t is given by Yt = (integral from i = 0 to 1 A_it di)11 =

integral from 0 to 1 (A_it di) + integral from i = 0 to 10 A_{j(i) t} di

Total spending on R&D at time t = D_t = intergral from j=0 to 1 (integral from i=0 to 10 D_ijt di dj where D_ijt is the rate of investment by agent i in technology j at time t

Total consumption C_t = Y_t-D_t

the consumption of agent i at time t is C_it

Note that firms do not invest in R&D. They pay all of their revenues to their employees no matter what and so have profits zero whether they have advanced technology or not. Workers do invest in R&D. In the model they feed consumption good into the R&D sausage grinder and technology comes out. In an only slightly more realistic interpretation (which is identical except for notation) they spend some of their time working for a wage and some conducting household production of technology through household based research and development.

Clearly agent i invests in further development of technology j only if j= i - floor(i). define d_it = D_{i (i-floor(i) t} which is obviously equal to all the investment in R&D by agent i. It should also be fairly obvious that in equilibrium only agents with iless than1 invest in research and development. the reason for the horrible assumption about the double endowement of labor of these agents is to make this equilibrium unique. This is, in principle, a result not an assumption so formally

d A_j/ d_t = (sum k = 0 to 9 d_{j+k t})/eta

where eta is the usual cost of R&D parameter.

r_t is the instantaneous real interest rate at time t. R_t = integral s = 0 to t r_t ds

Agent i chooses C_it and d_it to maximize

integral t=0 to infinity e^-(rho t)ln(C_it)dt

subject to integral t= 0 to infinity e^-(R_t)(((C_it+d_it) - 2A_it)dt less than or equal to 0 if i less than 1

integral t= 0 to infinity e^-(R_t)(((C_it+d_it) - A_it)dt less than or equal to 0 if i greater than or equal to 1

and d A_j/ d_t = (sum k = 0 to 9 d_{j+k t})/eta for every t.

In equilibrium agents with i less than1 are indifferent between investing and R&D and consuming. Clearly agents with igreater than or equal to1 strictly prefer to consume so d_i=0 if i greater than or equal to 1

The two problems become the very boring and standard

if i greater than or equal to 1

agent i choose C_it to maximize

integral t=0 to infinity e^-(rho t)ln(C_it)dt

subject to

integral t= 0 to infinity e^-(R_t)(C_it - A_it)dt less than or equal to 0

and if i less than 1

Agent i chooses C_it and d_it to maximize

integral t=0 to infinity e^-(rho t)ln(C_it)dt

subject to

integral t= 0 to infinity e^-(R_t)(((C_it+d_it) - 2A_it)dt less than or equal to 0 and

d A_j/ d_t = d_{i t})/eta

A solution ( I think the solution) is a balanced growth path in which

D_t/C_t is a constant

lets see what happens if it is 0.1 . Can I find an eta so that D_t/C_t = 0.1 if agents make optimal consumption/saving/R&D investment choices ?

d_it = A_it if i less than 1

D A_it/dt = A_it/eta

if r_t = rho+1/eta then growth is balanced.

OK first order conditions. Agents with iless than1 must be indifferent between consumption and R&D while agents with igreater than1 must be indifferent or strictly prefer consumption to R&D (so dit=0 is a corner solution for igreater than or equal to1) . I will check this last.

Also, there are consumption saving choices for both agents with iless than1 and igreater than or equal to1 so both must have consumption grow at the same rate (all will have saving equal to zero in equilibrium, but I must check that all choose neither a borrower nor a lender to be). This is satisfied if d_it/C_it is constant for every i. For any constant r_t = r that constant can be chosen so A_it grows at the same rate as C_it which means that d_it/C_it is constant and must be the same constant for every iless than1 (it is zero for every igreater than1). So things look OK so far so long as r_t is constant and d_it/C_it is the same for every i and for every t. This means that Ajt grows at the same constant rate for every j and t.

Now I need to check the choice between consumption and R&D. I know agents are indifferent between consumption and saving (and all save exactly zero) so I need that the return on an investment in R&D = r.

For agents with iless than1 the return is 2/eta for one unit of investment in R&D in technology i, the agent has a flow labor income higher by 2/eta per unit of time. So r = 2/eta. Oh it is constant. For agents with igreater than or equal to0 the return is 1/etaless thanr so they don't invest in R&D.

In the guess that dit/Cit = 1 for iless than1, I need

r-rho = 1/eta and r= 2/eta so 1/eta = rho.

more generally I get the rate of growth of consumption C_it is 2/eta-rho (for all i and t) so the rate of growth of each A_j must be 2/eta-rho so,

for i less than1, d_it/A_it = eta(2/eta-rho) = 2-eta*rho

they neither borrow nor save so C_it/A_it = (w_it-d_it)/A_it = 2 - (2-(eta*rho)) = eta*rho. I get balanced growth at rate 2/eta-rho so long as C_it = w_it for i greater than or equal to 1 and C_it = eta*rho*A_it for i less than1, that is C_it = (eta*rho/2)w_it for i less than 1.

OK so I think the model solves out for a constant growth rate = 2-eta*rho for any rho and eta.

Go Ask Moses

with apologies to Jefferson Airplane and Jehovah

+

One plague makes Nile redder

And one plague makes frogs fall

And the calf that Aaron made you

Won't do anything at all

Go ask Moses

Of his ten great laws

-

And if you go chasing rabbis

And you know Eve's going to fall

Tell 'em an apple-toting evil serpent

Has made her drop the ball

Spare Isaac

When he was just small

-

When a man on mount Sinai

climbs up then tells you where to go

And you've just read some kind of midrash

And your mind is on the Law

Go ask Moses

I think he'll know

-

When logic and proportion

Have fallen sloppy dead

And the Torah is written backwards

Holferness off with his head

Remember what the Pagans said

"Round your head"

"Round your head"

Thoughts on "Euler's Theorem Denialism"

Paul Romer is not diplomatic. This post compares David Andolfatto to a physicist who claims to have built a perpetual motion machine. I want to comment on the post. I will assume that anyone who reads on has clicked the link and read the Romer post. I haven't read the Andolfatto post which Romer criticizes. update: ooops I have read that post. I didn't recognise it from Romer's discussion until I clicked the link and saw the illustration.

Romer argues that Euler's theorem (regarding homogenous functions) has the same intellectual status as the second law of thermodynamics writing "denies Euler’s theorem, which for economists is about the same as denying the second law of thermodynamics is for physicists."

I find this odd, because Euler's theorem is math while the second law of thermodynamics is a scientific hypothesis -- it doesn't just follow from standard assumptions it implies predictions which have been confirmed again and again and again. One exception would prove the second law of thermodynamics false (for example if someone actually made and demonstrated a perpetual motioni machine). I think Romer's post is an illustration of the fact that for economists, standard assumptions have the status of known facts.

In particular, I think Romer assumes, and assumes one must assume, that firms maximize profits. To be fair, I guess he really notes that Andolfatto assumes that firms maximize profits. This whole post might be a verbal quibble about leaving a shared assumption unstated.

update 2: Wow Paul Romer has commented on this post. He doesn't think that one must assume that firms maximize profits (my guess was just wrong -- sorry for casually typing it). Also he notes that Andolfatto discussed "a competitive equilibrium with price-taking behavior" and that equilibrium in this context implies profit maximization (as well as utility maximization and market clearing). In fact the assumption was stated by Romer. Again sorry about an incorrect quibble. end update 2 Romer considers two possibilities -- either there is market power or there is price taking. Price taking means that firms maximize profits taking prices as given and also that one firm can't affect market prices. The two meanings are identical if it assumed that firms are rational profit maximizers.

Romer writes about what must be true -- he claims that Andolfatto's claims are mathematically impossible. Now, I am sure that Andolfatto assumed rational profit maximization so I don't really have a defence of his post (which I haven't read (update: I have read it)).

I think I can focus by writing about what Romer wrote about something else which I haven't read

But the next level down in the hierarchy, followers like Boldrin and Levine are willing to just embarrass themselves:

It is widely believed that competitive equilibrium always results in prices equal to marginal cost. Hence the belief that competition is inconsistent with innovation. However widespread this belief may be, it is not correct. It is true only in the absence of capacity constraints, …(2008, p. 436)

They say they can ignore Euler’s Theorem, because in their bizarro version of a competitive equilibrium, prices for inputs do not equal marginal products.

But instead of presenting a competitive equilibrium of this type, they present a of an innovator who turns out to have market power. Their solution? The innovator has to be a price taker because they say so:

Making the initial single innovator behave competitively even in the very first period may be a source of misunderstanding. Since, by necessity, she has a monopoly in the initial period, why do we not take account of her incentive to restrict the initial supply…? (Boldrin and Levine, 2008, p. 438)

So in the analogy from physics, Boldrin and Levine say that it is possible to build a perpetual motion machine, but to their credit, at the last moment they back off and invoke the can-opener joke: “Well we haven’t actually built a perpetual motion machine, … so let’s just assume that we have one.”

What if Boldrin and Levine discussed a "bizarro version of a competitive equilibrium" but then don't present a competitive equilibrium of that type. The "bizarro" discussion would be an aside, perhaps a distraction, but not an error. It also isn't bizarre at all. If there is an absolute hard capacity constraint, then variable inputs do not always have a marginal product. The partial derivative of output with respect to the variable input does not exist when output hits capacity there is a kink in output as a function of that input (for other inputs given).

Similarly marginal cost doesn't exist at capacity -- it is the derivative of cost with respect to output and at capacity there is only a left derivative not a derivative -- if price is greater than marginal cost (as conventionally defined at that point as the left derivative) a price taking firm can't obtain greater profits by producing more -- that's what "capacity constraint" means.

I can sketch a hint of part of a growth model with price taking and capacity constraints. It is crazy, but I think it can be made consistent (hmm claiming consistency based on presenting a part of hmmm).

As a result of costly R&D new intermediate goods are sometimes invented. It is assumed that a continuum of agents of measure one has the same Eureka moment (at the same moment). Each has a limit to how much of the good they can produce so that if all produce to capacity 2 units of the good are produced in total. The good is sold to a perfectly competitive final goods sector where the marginal product at 2 units is 3. The cost of producing a unit of the good is 1 per unit. The inventors share a total profit of 2>0. Each inventor correctly assumes that the price will be 3 no matter what she does. Therefore each produces at maximum capacity. This is profit maximization with price taking where the profit maximizing point is a corner solution. No first order condition holds at a corner solution. Now it's crazy to assume that infinitely many people have the same idea at the same moment. But that's just because it is always crazy to assume perfectly perfect competition.

I suppose one might consider the concept of a capacity constraint to be bizarre, but there is nothing bizarro about the (super brief) discussion of the implications of capacity constraints

OK that was a long aside about a short aside. Now "Since, by necessity, she has a monopoly in the initial period, why do we not take account of her incentive to restrict the initial supply…?" I sure don't know the answer to that, but I can make up a story which doesn't seem bizarre to me which works except for the word "she". I think it is entirely possible that firms with market power act as price takers. This implies failing to respond to an economic incentive -- failing to maximize profits. In my story the firm has two divisions production and sales. The production division looks at the price for which the good has been sold, treats it as given and figures out how much to produce. The sales division sets the price in order to sell all that has been produced. There is no Walrasian auctioneer so people in sales must notice that they have to cut the price to sell all of the product -- they know the firm has market power. But, the salespeople have no incentive to tell the production people about this (they have poorly defined incentive contracts that they must sell a quota of the product for a price not lower than that charged by other sales people). The firm doesn't maximize profits, because of a failure of communication.

Is this really less plausible than the standard model in which a large number of people work together as one to maximize profits for the sake of shareholders they have never met ?

In the end (which I trust no reader has actually reached, because don't you have anything better to to with your time) this is a quibble. "Price taking" can be defined as both firms attempt to maximize profits assuming that their actions don't affect prices and their actions in fact don't affect prices. Certainly my attempt to defend fresh water economists by questioning the assumption of rational profit maximization is bizarre in the extreme. I guess the proviso "if we all assume rational profit maximization (as we all do) then ..." might be assumed to go without saying, and all I am saying is that Romer went with it without saying.

Greenberg, Drum, Streamlining, and Populism

The Washington Monthly has been publishing a lot of discussion of the idea that Democrats can win back the white working class, which supports many of their proposals, if and only if the Democrats convince them that the Democrats will streamline government and make it more efficient. Kevin Drum is skeptical. I am much more skeptical. My post below was originally a comment on his post here. It is really a critical discussion of Stanley Greenberg's analysis of his team's important research here.

The Average Joe’s Proviso Surprising numbers of white working-class voters will support the Democratic agenda—if Democrats promise to reform the government that would carry it out. By Stanley Greenberg

I object to the bolded words in the title and abstract.

I am not at all convinced by Greenberg's interpretation of the polling and focus group data he presents. He insists that the Democrats problem is that people think government is inefficient etc and the solution is to convince people that the Democrats will streamline government. But first he found strong support for the Democratic message among people *not* prompted with the prior clean up government message. The claim that white working class Americans would like the government to do more but only under the proviso that it is cleaned up first is just not supported by his description of his raw data. What he found was even more support for the Democratic message if it is preceded by a clean up government message. "proviso", and "if" used to mean "if and only if" overstate the evidence.

I quote Greenberg's report of actual data

We asked presidential-year voters to react to a battery of bold initiatives that could form a Democratic economic agenda for 2016. They include policies to protect Medicare and Social Security, investments in infrastructure to modernize the country, a cluster of policies to help working families with child care and paid leave, and new efforts to ensure equal pay and family leave for women. Voters embraced these initiatives, and they tested more strongly than a Republican alternative.

Notice no "provided that" or "so long as" or anything which justifies "proviso" or "if". Of course voters would also like a more efficient government (why not).

Much more importantly, the message which caused increased support for Democratic proposals was absolutely not a streamline government message. It started with denunciations of money in politics (along with Republicans are bought and paid for by selfish greedy billionaires). Then it went on to dump on bureaucrats. there is no way that Greenberg's analysis of focus groups can distinguish between the hypothesis that "streamline government" is a winning message and the hypothesis that populist appeals to anger and class resentment are the winning message. He included both. I think a distaste for the politics of resentment, the politics of division, the politics of class struggle (called class war by oponents) is blinding people to the strong evidence of powerful populist anger.

This from Greenberg's article

one of the most effective campaign attacks we tested linked big donations to politicians advancing the interests of wealthy donors who used unlimited, secret money to make sure that billionaires’ and CEOs’ taxes remained artificially low and their loopholes stayed protected.

The power of this attack comes from the central role of the corrupt Washington and Wall Street nexus in the new economy. While working-class men struggled, the Republican candidate was helping government work for big corporations and special interests.

When Democracy Corps tested this attack in Louisiana, North Carolina, Georgia, Iowa, Colorado, and the other Senate battleground states, it was among the most powerful attacks on the Republican candidates.

Of course, none of the Democratic candidates ran that ad.

Note the effective attack, as described by Greenberg, includes no discussion of streamlining government or making it more efficient.

Here is the main report of new research

in a straight test, the presidential electorate is as enthusiastic about a reform narrative as the middle-class economic one. The first part of the narrative focuses on big business and special interests that give big money to politicians and then use lobbyists to win special tax breaks and special laws that cost the country billions. The second part emphasizes how special interests and the bureaucracy protect out-of-date programs that don’t work. The bottom line of the narrative is that government reform would free up money so the government could work for middle-class and working families rather than big donors.

Most importantly, when voters hear the reform narrative first, they are then dramatically more open to the middle-class economic narrative that calls for government activism in response to America’s problems.

See how the effective priming narrative appeals to anger at big business, special interests, lobbyists and big donors. It strikes me as a populist message not a "streamline government and improve efficiency" good government message.

I guess my alleged point is obvious. I'm just saying that here we may have the wonk version of the pundit's fallacy -- wonks who devote their lives to trying to figure out how to make the government more efficient argue that this is also the way to win elections. Well I prefer to think about how to improve policy than to appeal to anger and resentment. But Greenberg's data are Greenberg's data.

I absolutely agree with Kevin Drum's view that it will be impossible to convince people. I'd add that even actually streamlining government and making it more efficient (which can only be done after massively winning elections) wouldn't convince most people. Most people don't think that Democrats cut taxes for most US families in the period 2009-10 -- their own taxes were cut by the ARRA and they didn't notice. Most people think that the ACA is costing more than forecast. If people can't even notice that actual spending is lower than forecast spending, how anyone hope that they would detect something much more subtle like streamlining or efficiency ?

Here is evidence supporting my claim but quoted from Greenberg's article

In the spring of 2010—a year into the implementation of the American Recovery and Reinvestment Act—Democracy Corps asked voters, “Who are the main beneficiaries of the Economic Recovery Act?” Almost half, 45 percent, said that unemployed Americans benefited a lot or some from the act, and a lesser amount, 34 percent, said the middle class was benefiting. But three-quarters said the big banks and financial institutions were the beneficiaries, and 50 percent said they benefited a lot—more than eight times the number who said that for the middle class. White working-class men were particularly outraged, with six in ten saying that the banks benefited a lot. White working-class respondents were the ones most likely to say that they themselves were not benefiting: just one in five said they benefited from the Economic Recovery Act.

Almost all had benefited at least from the making work pay tax cuts. In contrast the ARRA helped big banks only becaues it helped the economy. Respondents conflated the ARRA and TARP -- two completely different programs (initiated by bills signed by two different Presidents). The ARRA spending included unusually little fraud and abuse. It was, in that sense, streamlined and efficient. But that does the Democrats no good if most people think that the ARRA was TARP.

Note that this proof that good policy is not always good politics is found in an article cited by many as supporting the claim that the key to winning elections is streamlining government and making it more efficient.

Oh che Male

Martin O'Malley is running to the left of Hillary Clinton so it has to hurt that he is losing the Daily Kos straw poll to "no fucking clue". How exactly does he plan to win the nomination ? I have no fucking clue.

Solinas not Solace

Benen To that end, Sen. Jeff Sessions (R-Ala.) thought he was making an important point yesterday, addressing the Constitutional Accountability Center's Elizabeth Wydra: "I think maybe, Ms. Wydra, the statute could have just been written, 'Our goal is to make available health care for all Americans.' That wasn't what the law said, however." In 1994 Dr Antonello Solinas (hepatologist) said (as I translate) "Losing is always painful, but losing to that band of buffoons is humiliating." The thought of losing to the GOP in 2010 and 2014 is driving me to drink.

DeLong Praises The Long Run

"these beliefs hinged and hinge on a firm and faithful expectation that this long run is at hand, or is near, or will soon draw near (translations from the original koine texts differ)" those who believe will not taste death before, but will live to see exit from the liquidity trap"

I commented

"Yea, though I walk through the valley of the shadow of debt, I will fear no evil: thou -- long run -- art with me; thy root and saddle path, they comfort me."

He commanded

"You have a moral obligation to expand this to its full and proper length..."

so don't blame me for what follows.

The Long run is my shepherd, I lack nothing.

He makes me slide down eigenvectors,

he leads me beside calm markets,

he refreshes my screen.

He guides me along the saddle paths

for his game’s sake.

Even though I walk

through the local minimum of the shadow price of debt,

I will fear no lambda,

for you are with me;

your root and your graph,

they comfort me.

You prepare an I.O. table before me

in the presence of my counter parties.

You adjust the price of oil;

my R & D spills over.

Surely your TFP will follow me

all the days of my life,

and I will dwell on the balanced growth path

forever.

My Usual Comment on Simon Wren-Lewis

Simon Wren-Lewis very frankly discusses his faith in multipliers.

Why am I confident that multipliers that result from temporary decreases in government spending in current conditions will be somewhere around one rather than somewhere around zero? It is not because of empirical studies that try to directly estimate multiplier sizes.

Do not get me wrong. Such studies are very important, as are meta studies that try and pull together and synthesise the large number of individual studies. However I tend to use them to either confirm or question my priors. My priors come from thinking about models, or perhaps more accurately mechanisms, that have a solid empirical foundation. Let me explain.

[skip]

Here my starting point is to note that because the increase in government spending is temporary, any impact on pre-tax income or taxes will be relatively small relative to a consumer’s lifetime income. As a result, aggregate consumption is likely to change either way by an amount that is a lot less than the cost of the school. For similar reasons firms think long term when planning investment, so they are not going to invest that much because of a temporary increase in government spending and GDP.

the cost of the school is the increase in G

My comment.

This is my usual comment. I think it might be well worth ignoring.

I get the impression that you consider the range of debate (the Overton window) to be from RBC to New Keynesian (with a bit of open-ness to aggregate modelling). The reason is that you consider only two possible beliefs about multipliers "will be somewhere around one rather than somewhere around zero"

You don't consider the possibility that the government spending multiplier (for an economy at the ZLB) might be well above 1, as it would be in a paleo Keynesian IS-LM model.

"any impact on pre-tax income or taxes will be relatively small relative to a consumer’s lifetime income. "

"My priors come from thinking about models, or perhaps more accurately mechanisms, that have a solid empirical foundation. "

Also perhaps less accurately. You have a strong prior that consumption mainly depends on lifetime not current income. Importantly, you are discussing macro and multipliers so you have a strong prior that aggregate consumption mainly depends on permanent not current income.

Yet you discuss strong empirical support. I ask whether there is any empirical support for your view. There is an over long timesome literature on testing the PIH, but there is not a similarly large literature on testing the hypothesis that only current and lagged income matters.

At the very least, there should be evidence of Ricardian effects -- that if one considers consumption and disposable personal income, then high budget deficits should correspond to surprisingly low consumption. I know of no evidence of this (of course I am considering market economies without legal rationing so not WWII).

Surprisingly high consumption should be followed by unusually rapid income growth. It is not for the USA.

What is the empirical basis for your beliefs that there is something to the PIH, and that the economy can be understood by assuming that consumption of the non-liquidity constrained roughly fits the PIH ?

I think consumption can be fit almost exactly using disposable personal income and the ratio of non-human wealth to disposable personal income. That non-human wealth includes a lot of common stock -- whose price is not correlated with future dividend growth (as noted by Robert Shiller).

Investment is highly correlated with GDP growth. It may be that firms should think of the medium term when choosing investment. I note that a large part of the cyclical variation of NIPA investment is variation of net inventory investment. I do not see why firms should think of the medium long term when choosing inventory levels. Another very important component of investment is residential investment -- that is the type which responds noticeably to real interest rates.

I think your priors come from thinking about models.

update: Stolen from Paul Krugman's comment thread trusted commenter Woof wrote

Woof! is a trusted commenter NY 13 hours ago

Two fiscal multipliers are commonly used (focusing on expenditure):

1. Impact multiplier=(∆Y(t))/(∆G(t))

2, Multiplier at horizon i=(∆Y(t+i))/(∆G(t))

So it would be useful to know to which PK is referring. It appears that he is talking about the impact multiplier.

Secondly, it matter if monetary policy is "normal" or if the CB implements a ZLB policy.

Based on a survey of 41 studies, Mineshima and others (2014) show that first-year "normal" multipliers amount on average to 0.75 for government spending in advanced economies.

But there is general agreement that at ZLB (zero interest policy) the fiscal multiplier can be higher.

Christiano and others in 2011, for the US, have a multiplier of 1.1 , but for ZLB implemented they estimate that initially the multiplier can be as high as 3.7

Eggertson 2010 has 0.5 , with 2.3 for ZLB. Erceg and Linde (2010) have a multiplier of 1, but at ZLB an initial multiplier of 4.

Finally, it has to be kept in mind that ZLB multipliers fall with time, and that the Fed's has operated at ZLB for several years , As always, the devil is in the details.

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Fiscal Multipliers: Size, Determinants, and Use in Macroeconomic Projections By Nicoletta Batini, Luc Eyraud, Lorenzo Forni, Anke Weber, International Monetary Fund, Oct 2, 2014,

Kentucky Senators Lose

News coming at what is lighting speed for the US Senate

The Senate rejected all amendments and approved the US Freedom Act exactly as passed by the House. US readers your meta data will be stored again as soon as Obama signs the bill (no change for me, I'm completely unprotected by FISA).

Note the rapid evolution from the url to the headline

http://www.nytimes.com/2015/06/03/us/politics/senate-surveillance-bill-passes-hurdle-but-showdown-looms.html

"Senate Approves Bill to Rein In N.S.A. Surveillance"

By JENNIFER STEINHAUER and JONATHAN WEISMAN

It's a FBD big deal for the no longer working on Sunday and, get this, out by 5 PM Senate and it couldn't have happened to a nicer Senate delegation.