The usual.

You confidently assert that the Fed can control nominal GDP and chose a path below the trend line. Why not just cut out the middle man and say the Fed controls employment and chose a level below that of 2007 ?

Current Fed policy is, by far, the most expansionary in its history. Normally, the Fed works via the Federal Funds rate which is now essentially zero. People like you demanded more, so the Fed did much much more. We are currently nearing the end of QE2 which is a vastly huger series of open market operations than any under any Fed chairman other than Bernanke. I think there is no statistically significant evidence that the gigantic effort had any effect at all on the economy.

Yet you simply assert that future nominal GDP growth is a function of monetary policy. I know you are familiar with the concept of fiscal policy. You criticize Obama, Reid and Pelosi for failing to criticize Bernanke. How about criticizing them for calling for deficit reduction ? Their position on fiscal policy is contractionary. Bernanke is, by far, the most pro inflation prominent public official in the USA (quick pop quiz who's second).

Yet you are sure that he is the problem.

I ask for information (and await an answer) what hypothetical imaginary evidence could possibly convince you that you over-estimate the effectiveness of quantitative easing when the economy is in a liquidity trap. What could conceivably happen which would convince you and which hasn't happened already ?

I assume my complete inability to imagine any evidence reflects only my lack of fantasy. You have an outstanding imagination. Help me.

Here is another one. You believe that QE is an effective approach. You don't believe in so called supply side economics. You have, no doubt, noticed some difference between the approach to data analysis favored by advocates of the two different policies.

I have noticed no difference at all. Please find an example of some absurd special pleading by supply siders which I can't match with an essentially identical example from quantitative easers.

A Partial Defence of Ben Bernanke

Suddenly, I feel very lonely. Paul Krugman has ceased to defend Ben Bernanke. His partial defence of Bernanke is that Bernanke is lying because he is terrified of Ron Paul. I have the impression that everyone disagrees with me. Also I didn't watch Bernanke's press conference or read the transcript.

The problem is that Bernanke said four things. Unemployment is a terrible problem, inflation is not at all a problem, the Fed can cause higher inflation and lower unemployment, and the Fed should not do so. Which one here is not like the others ?

Krugman and Kash Mansouri agree that Bernanke is terrified of the inflationistas.


I have two slightly different theories. I'm afraid I am going to have to assume that Bernanke was lying (his statements are not logically consistent and he isn't an idiot to put it mildly). But I aim for a slightly more noble lie.

1) The false claim is on point three -- that the Fed can stimulate the economy. I'm not convinced that Bernanke believes that it is true. I'm not even sure that the Fed can stimulate the economy given current legal restrictions on its actions (I don't know the law but I'm sure that actual helicopter drops of money are not allowed).

Krugman's evidence is the following

He could have argued that he lacks the ability to do more, that he and his colleagues no longer have much traction over the economy. But he didn’t. On the contrary, he argued that the Fed’s recent policy of buying long-term bonds, generally referred to as “quantitative easing,” has been effective.

Yes you read that correctly. Krugman draws his inference from the fact that, in a press conference, a public official said that his recent policy had been effective. Oddly, Krugman and many others have recently tried to explain why that policy was disappointing. The claim that it worked fine was rejected without consideration. This is largely because there is no evidence that it worked at all.

But an unsupported claim that the Fed's performance has been good is accepted as sincere and, indeed, as proof that the Fed has the ability to do more.

What was Bernanke supposed to say ?

We have no idea what to do
We've tried and tried and have no clue
with no alternative we QE2ed
it didn't work, so now we're screwed

If his sole aim is to cause high expected inflation, he might rationally claim that the Fed can cause higher inflation any time it wants, and there are good reasons to chose higher inflation, but they won't for some incomprehensible politico-psychological neurosis. The hope that they will come to their senses (stranger things have happened) implies higher expected inflation than corresponds to the facts of the matter which is that they have tried everything they can think of and nothing worked.

Another noble lie. Bernanke is pretending that he is still a Republican (I'm not saying he left the party but the party sure left him). It may be that the Fed can do more (I think it can) but no possible monetary policy would make up for Treasury default or even a government shutdown. Bernanke's main useful role is to convince the Republicans in Congress to refrain from destroying the world economy.

This is close to the Kash Krugman story, but it isn't identical. I'd guess that Bernanke fears Ryan and Cantor and Pence not Paul.

I don't think QE3 would achieve much of anything, but even if I'm wrong, it just isn't important compared the the margin of hope that the last sane Republican has some influence on his party.

David Brooks vs Google part MMMCCCXLIV

He watched a musical and then wrote

Rigorous codes of conduct allow people to build their character. Changes in behavior change the mind, so small acts of ritual reinforce networks in the brain. A Mormon denying herself coffee may seem like a silly thing, but regular acts of discipline can lay the foundation for extraordinary acts of self-control when it counts the most.

and

I was once in an AIDS-ravaged village in southern Africa. The vague humanism of the outside do-gooders didn’t do much to get people to alter their risky behavior. The blunt theological talk of the church ladies — right and wrong, salvation and damnation — seemed to have a better effect.

I have excerpted but I promise you that the only empirical evidence on the effect of different religions on behavior is that "seemed." This was not a joke or a parody. This is the real David Brooks. He is contributing to the debate on an empirical question in the human sciences (OK I'd say sociology but sociology is known to be pinko) by attending a broadway musical and discusses how things "seemed" (his word not mine -- those aren't scare quotes -- he typed that word).


My first google search gets me to this pdf which says

"Among the major religious categories considered here, we find that conservative Protestants generally have higher teen pregnancy than other groups."

The other categories are Catholic, no relgion and other. The excluded group is other which would therefore be non-conservative Protestants, Orthodox, Jewish, Muslim, Buddhist, Hindu, and Wiccan (if any). Catholics and others have similar rates of teenage pregnancy. Thos with no religion have high teenage pregnancy when under 17 then almost exactly the same as Catholic and other. Thos raised conservative protestant crank em out in their teens also controlling for race and region.

Thats first google, second hit I clicked (the first was a discussion among non experts who guessed the result). the authors (Powers and Ellison) also find that withing categories the more devout are less likely to get knocked up, but that isn't related to Brooks' claim which is that more demanding denominations have better effects. His claim is contradicted by the first scientific study I found following my first google search.

Other points. He notes that religion in Africa is often very demanding

But it’s worth remembering that the religions that thrive in real-life Africa are not as nice and naïve as the religion in the play. The religions thriving in real-life Africa are often so doctrinaire and so socially conservative that they would make Pat Robertson’s hair stand on end.

I guess that's why Africa is doing so well compared to Scandanavia (where most people identify with no religion at all). This is oddly the opposite of the red state blue state ecological fallacy which he loves so much (he sure isn't going to compare freequency of membership demanding denominations and outcomes by US states).

Also

Dorothy Sayers argues that Christianity’s advantage is that it gives value to evil and suffering. Christianity asserts that “perfection is attained through the active and positive effort to wrench real good out of a real evil.” This is a complicated thought most of us could not come up with (let alone unpack) outside of a rigorous theological tradition.

Why yes that is true. The whole doctrine of returning good for evil had to come out of a rigorous theological tradition -- that is why it is clearly stated by the Socrates character in Plato's Republic. Oh and by a Rabbi crucified for heresy whose teachings are largely focused on treating the Law as a living thing. I mean really, this is not a joke, the defenders of rigorous theological tradition base their case on the insights of two people who were put to death for violating theological tradition.

Even though I am typing about a Brooks column, there is something interesting here. For some reason arguments which are comically bad (honest its in the New York Times not The Onion) are publishable if the conclusion is that religion is good and demanding traditional religion is better. it is just excessively politically incorrect for a member of the coastal elite to subject such claims to any scrutiny at all.

I am always amused by the utter contempt for the Constitution typical of self proclaimed "constitutional conservatives."

"Remember that budgets are not law," - Rep. Charles F. Bass (R-N.H.)
"No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law;" US Constitution.

The odd thing is that this assault on the Constitution serves no purpose. It isn't like the constitutional conservatives enthusiasm for undeclared wars, the unitary executive, warrentless wiretaps, detention without trial, and torture.

update: correction corrected.

What Rep Bass would have said, were he able to speak Engish, is "remember that budget resolutions are not budget bills which are law." A budget resolution just budget resolutions are not law unless and until they are approved by a majority of Senators who are present and voting and signed into law by the President or approved by a majority of Senators present and voting, vetoed and the approved by two thirds of representatives present and voting and by two thirds of Senators present and voting". Oh hell he could just have said "bills approved by the House are not law -- there are a Senate and a President too." But no he had to equate a vote on a budget bill in the house with a budget (false) and say that budgets aren't law.
It's as if he went out of his way to spit on the Constitution.

Confession Penance and Absolution for Bloggers

Jacob Weisberg confessed and his Shrillness himself has denied him absolution.

Confession

I deserved some of the abuse. Though I criticized Ryan for his unsupported rosy assumptions (shame on you, Heritage Foundation hacks), I reacted too quickly and didn’t sort out just how laughable Ryan’s long-term spending projections were.

No absolution.

Um, how can you lavish praise on a supposed long-term budget proposal without, you know, asking whether its long-run spending projections make sense? [skip]

Look, this is an important debate. If you can’t be bothered to look at the numbers, you shouldn’t weigh in.

Dog bites man, Krugman makes another enemy.

I think that Krugman requires at least an act of repentence. Damn I don't often wish I was raised Catholic but how does it go ?

I Jacob Weisberg convess that I blogged in hast, most bitterly repent my sin and swear, with Google's grace to in the future avoid both haste and the near occasion of haste.

But how the hell does one avoid the near occasion of haste when blogging ?

I Robert Waldmann confess that I have often with perseverance in my sin blogged in haste and wonder how I can avoid the near occasion of haste ?

OK Weisberg has a budget and can hire an editor for his blog (he can still edit the rest of Slate). A disenabler. He could hire some kid and give the kid his password and tell him to make a new password and not tell Weisberg what it is. Then Weisberg submits blog posts which can only be posted by his blog's editor. The deal is the editor is fired if and only if Weisberg has to apologise for hasty blogging again.

It would work but it is not allowed by this blog's budget ( $0 and 00 cents). But there must be some way.

I don't like to wake up in the morning. If I could only blog between 7:00 and 7:05 AM I wouldn't post without sleeping on it. The same works for early risers who have trouble keeping their eyes open till midnight. If blogspot only allows posts between 12:00 and 12:05 AM, the blogger would be struggling to stay awake and wondering "is this really so urgent or can it wait till tomorrow).

Less extreme measures might work a little. As in to post one must hit post twice and the second time after an hour. It would be necessary that no editing be allowed between these clicks on the publish button (else one could edit a post on the weather into hasty praise of Paul Ryan).

E.J. Dionne and Charles Krauthammer agree on something and they are wrong.

Krauthammer wants the Republicans to run in 2012 the way he thinks they ran in 2010. He predicts a roughly similar outcome. Dionne would like that too, he predicts the opposite outcome.

I note that Krauthammer is, in fact, proposing that they run the opposite of their 2010 campaign and I agree with Dionne that they will be hammered if they do.

According to Dionne's paraphrase Krauthammer "asserts that Republicans would do well to make the 2012 election as much like the 2010 election as possible and focus the campaign on 'the size and reach of government, spending and debt, and, most fundamentally, the nature of the American social contract.'"

Dionne concludes

"yes, let’s rerun 2010. I am persuaded it will come out quite differently the next time around."


I comment

Yes let's rerun 2010. I'm quite convinced it will come out the same way -- the party that votes to cut the Medicare budget will be hammered. I think the winning 2010 slogan was "keep your government hands off my Medicare." that Republicans won partly because the economy was in terrible shape and partly because the Democrats had dared to cut the budget of a very popular single payer governement insurance program.

Your analysis is convincing as far as it goes, but it doesn't go far enough to be consistent with polling data. The Ryan proposals (when briefly described) are indeed rejected by the Democratic party base, but they are also overwhelmingly rejected by the Republican party base.

Quite figuratively, I wonder if there is something in the water in the Washington Post building. Inside that building it is agreed that entitlements must be masively cut. This view is supported by CBO forecasts and is shared by a very small minority of US adults. You have every right to believe what you believe (and I agree Medicare spending growth should be restrained -- as it was by the PPACA for example) but you shouldn't ignore the actual campaign and all polls when interepreting the 2010 election.

Below I complain that Jon Chait has a Climited* view of possible taxes but this post is brilliant.

He askes why Paul Krugman and David Brooks hate each other. My thought was that, while Krugman ruthlessly criticises Brooks, he ruthlessly criticises almost everyone, so that doesn't show much, and of course Brooks hates Krugman, I sure would.

But I have noticed that Krugman seems to be dumping on Brooks a lot (without naming him as per NY Times rules).

Before moving back to praise, I think Chait's case that Brooks hates Krugman is weak. It depends on assuming that a statement about "most people" is presented as applying to Trump, when Brooks is drawing a contrast between Trump and most people.

But I am convinced that Krugman has it in for Brooks and not just for the reasons he states. Chait found this strange and horrible artifact




I think that Chait is right that the hippy holding the New York Times is meant to be Krugman even though he doesn't look at all like that. The article must give good reasons to ruthlessly criticize Brooks forever, but I fear that, for Krugman, there is one particular of the image which went tooooooooo far. Hippy Krugman is portrayed as balding. Now I have a receding hairline as you see (and a bald spot as you don't) but Krugman doesn't. He is very firm on this point.

I cut and past a post on the topic in full (fair use returns when the NY Times paywall is torn down)




* from To climit verb : To accept Bill Clinton as the left wing of the possible.

Chait on Weisbert on Ryan

In a typically excellent post, Jonathan Chait notes that Jacob Weisberg admits that he was maboozled by Paul Ryan. He also notes that Weisberg backslides immediately saying that, while Ryan's plan is absurd, Ryan is at least honest about some things. Chait quotes Ryan lying about both of those things. Very good.

However, Chait also discusses what we should do with our taxes. He wrote

[Obama] refuses to admit that the level of government he finds necessary would almost certainly require returning tax rates for the middle class, not just the rich, back to Clinton-era levels.

Here Chait simply assumes that tax rates must be either Bush tax rates or Clinton tax rates. Chait's assertion, stated without any wiggle room weasel words or wiggling weasels is that we have to return to Clinton tax rates. If you doubt my claim, re-read the quotation. Evidently, tax rates which are slightly higher than Clinton tax rateswould not pay for the level of government Obama finds necessary.

The quotation is a statement about budgetary arithmetic -- there is no reference to political feasibility. Yet Chait just assumes that rates higher than Clinton rates are impossible. He does not address the question of whether rates on income over $ 250,000 higher than Clinton rates (I'm not talking about absurd confiscatory Reagan-Kemp-Roth rates, just rates higher than Clinton rates) might make it possible to charge rates lower than Clinton rates on middle class incomes.

Here I must stress that I don't consider a family with income 249,999,99 middle class. In fact I don't consider a family with income 150,000 middle class. I think the true political poison is proposing tax increases on people below the 90th percentile whcih is well below $150,000.

One or the other I say. One can discuss budgetary arithmetic or politics, but a mixture in which Obama must commit political suicide by saying he will raise taxes on the middle class, because taxes higher than Clinton taxes on the rich are impossible will not do.

It is a fact that no one has proposed will propose a tax plan which pays for Obama's proposed spending, so the only one out there is the Clinton tax plan (which would eliminate the primary deficit for decades and probably forever given Obama's planshopes wishes for further Medicare spending cuts).

Not giving families with income over 250000 6 thousand in cuts compared to Clinton rates would yield about 20 billion a year (pocket change but every little bit helps). Phasing out the gain compared to clinton on incomes from say 200,000 to 250,000 would help considerably more. Raising the top marginal rate to Reagan-Kemp-Roth level would yield about 800,000 over ten years. Bringing back the Reagan era estate tax would yield a vaguely similar sum. Taxing dividends and capital gains as income (OK phase it in so not if income is under 250,000 and it grows proportional to fraction of income over 250000 uh squared. would do more. Phasing out the deductability of home mortgage interest (as repeatedly proposed by Obama) too.

All this together would give high marginal tax rates (the explicit rates plus the phasing out of this and that). It would be impossible to pay for ObamaGov without increasing taxes on families with income under $250,000, but it certainly wouldn't be necessary to raise them all the way to Clinton levels. It could be done subject to the rule that most people pay 0 or less in income tax or that taxes are cut for 60% of households compared to current taxes (not Clinton current).

The front line of the class war would have to shift a bit, but I am talking budgetary arithmetic and not politics.

Uh oh

Matthew Yglesias writes about a topic about which I know something -- taxes and growth.

He concedes that it isn't a topic which will be resolved by a blog post, then argues that taxes affect the level but not the growth rate of GDP. His claim is supported by economic theorizing using words not equations. The absence of equations is good, as far as it goes, but it doesn't go far.

It's not a topic which will be resolved by a blog post. Also I think it is clearly not a topic which can be resolved by theory. Here (as once before related to New Jersey) I am upset by what appears to be the illusion that economic theory can tell us something about the real world.

I agree with the conclusion, but I agree because of empirical evidence. Basically no one has managed to demonstrate a bad effect of taxes on growth after considering possible conditional convergence (that's something which is very definitely in the data).

The idea that we can tell a priori about what affects levels and growth rates is a mathematical error. Economists can convert anything which affects a level to something which affects a growth rate using the tricks of endogenous growth theory. Just the most nearly reasonable example is one in which growth is fundamentally based on technology, and technology developes due to costly research and development. Taxing away the profits of the firms which have developed new products (or less costly ways of making old ones) reduces the returns to R&D and, typically in the model, reduces growth.

Look if the problem is "take this level effect and make a growth rate effect" I'm pretty sure I can do it when woken up in the middle of the night, when standing on one leg, and when totally drunk). It takes a bit of effort to make a model in which taxing the profits of firms which have invested in R&D causes faster growth, but it isn't really hard (I can send you a *.pdf with the model and proofs, or look up a related published model

Alessandra Pelloni and Robert Waldmann (2000) "Can Waste Improve Welfare ?"
The Journal of Public Economics. vol. 77 pp 45-79.

Also and less eccentrically standard growth models have effects of taxes on growth. In particular, in standard endogenous growth models taxes on capital income cause lower growth rates. This is a well known and very simple mathematical result. In fact (as noted in the paper cited above) the result depends on the assumption that labor supply is exogenous, an assumption which is basically always made in endogenous growth models and which was assumed to be harmless. But I mean I am talking about developments in the theory of taxes and growth which were new in 1986.

Now one might argue that, after a good look a the data, it is reasonable to conclude that all this endogenous growth theory doesn't fit the data as well as the model which was new in 1955

but your post is written on the assumption that endogenous growth theory doesn't exist and can't exist (not just that your claims about what we can tell about the world using economic theory are contradicted by published economic theory but also that there is no model in hyperurania for which your claims are false).

WWW.washingtonpost.com headline guy (or gal)
now with screenshots





A more complete headline would be "Poll Finds Little Support for Debt Remedies Which are Tirelessly Advocated by Washington Post." Debt remedies which We don't advocate don't count.


In the actual article (which carefully buries the lede)

In his speech last week, the president renewed his call to raise tax rates on family income over $250,000, and he appears to hold the high ground politically, according to the poll. At this point, 72 percent support raising taxes along those lines, with 54 percent strongly backing this approach. The proposal enjoys the support of majorities of Democrats (91 percent), independents (68 percent) and Republicans (54 percent). Only among people with annual incomes greater than $100,000 does less than a majority “strongly support” such tax increases.

I think the only fair and balanced headline would be "Public Agrees with Obama not Ryan" with a sub headline. More than half of self identified Republicans support higher taxes on the rich.

The Republican party is so radical that it has lost the support, on the issues, of its base.

Yet for some reason, respondents don't know that they disagree with what Republicans are doing. Republicans agree with Obama and disagree with Republicans in Congress on actual policy proposals, yet " political independents side with the Republicans on tackling the burgeoning debt."

Could it be that the media haven't informed them, because the facts have a clear liberal bias ?

Huh ? WTF ?

I checked this blogs technorati rank.

I get that it has authority 465 which gives it rank 3856 ???

That is 3857 out of 1,195,449 which puts this blog in the top 0.4%

I think that technorati needs a debugging.

You *know* I kept a screenshot.

Minds link alike.

Kevin Drum quotes the same snark as my first quote of the day of yesterday.

He says the point is that the USA is the only country which can project military power globally. I totally let my comment run away with me.

I think you are a bit unfair to Pike (who let us say might be seen to have been asking for it). His criciticism just isn't "Britain and France should have more planes and more bombs. " It is that France and Britain should have fewer planes and more bombs.

The issue isn't global projection of power. Libya is close to France and France and the UK are using NATO bases in Italy. But it also isn't military capacity. It is that they have bought the extremely expensive planes but not a serious number of much cheaper smart bombs.

The "air shows" snear is not only funny. It is a substantive claim that they care about their military as it appears on paper (planes are counted and bombs aren't).

This is relevant to the US military procurement too. The plane NATO wants to deploy but which is not available because only the US has it and Obama doesn't want to endanger the crews is the AC-130 which is basically an armed for attack (hence A) C-130. The C-130 is propeller powered. It was designed in the 50s. It is the favorite plane of NGOs. It is the plane they need (they could also use A-10 warthogs which are newer and jet powered and all but just read that name).

Instead they have air superiority fighters which can bomb. These are planes with extremely impressive performance. They look super cool. They fly super fast. They look great in air shows. They have not been relevant to any war fought since the war in Korea (maybe since WW-II).

They have wasted a lot of money on exceedingly expensive planes, which aren't useful for their purposes (and France at least actually uses its military quite often -- they wre fighting simultaneously in Libya and Ivory Coast). These are the fun hot exiting planes that air forces want, but the point of procurement isn't to please the generals.

The reason this is important to your readers is that the USA has wasted a totally huge amount of money on similar fancy weapons. We can project power all over the world and give the USSR a fight for its money when we get there. But there is no USSR. The F-22 was the classic case and, at least, we've stopped at IIRC 83 (which will probably never be used). The Joint Strike Fighter will be the next huge sink of money (the hugest in military history).

The way we actually fight is to destroy air defences with cruise missiles and then bomb with planes designed in the 50s. The incredibly expensive ultr-fast stealthy planes which can shoot down the MIGs that the Soviet Union didn't last long enough to develop and operate over undestroyed air defences are irrelevant. They are irrelevant in Libya, in Afghanistan, in Kosovo, and in both US wars with Iraq. We spend gigantic sums on them, because the generals love them and because our expense is some defence contractors revenue.

How much do we spend on " heavy lift capacity, ... long-range bombers (that we actually use), ... huge arsenals of cruise missiles, ... [and] fleets of reconnaissance satellites, [and]...bombs" ? (note I didn't include the planes, the carrier groups or the bases -- those cost a lot).

A cruise missile costs about a million. You wouldn't notice the purchase of a thousand cruise missiles in the US defence budget. They clearly are key to our ability to crush adversaries. What is the total US cruise missile budget ? How much do the reconnaissance (and GPS) satellites cost ? How much does the US military spend on bombs ? What have B-1s ever done for us ? What have B2s done which B-52s couldn't have done better ? Why do we need carrier groups to launch cruise missiles ?

The vast majority of the DOD procurement budget has almost nothing to do with fighting the wars we actually fight.

One more Quote Today (at least)


Great review of "Atlas Shrugged" at alicublog. One sentence sums it up

"It's like a version of The Dark Knight in which the Joker says "I don't understand you, Batman," and Batman says, "I don't think you'll ever understand, Joker," and the Joker slouches off to get drunk at the Ebbitt Grill while Batman smiles at his glistening Batmobile."

Makes me think. There are lots of Randroid politicians in Washington (Alan Greenspan, Rand Paul and Paul Ryan ... heeey has anyone ever seen the two of them at the same time ?).

How many Randroid entrepreneurs have there ever been ? Does the approach of adoring yourself and showering everyone else with contempt really work ?

I stand corrected. The correctly scored quote of the day (via Think Progress, Balloon Juice, and daily Kos)

Albert Einstein said that a little knowledge would turn your head toward atheism, while a broader knowledge would turn your head toward Christianity.

Tennessee Rep. FRANK NICELEY (R-Strawberry Fields).

QOTD

Libya “has not been a very big war. If [the Europeans] would run out of these munitions this early in such a small operation, you have to wonder what kind of war they were planning on fighting,” said John Pike, director of GlobalSecurity.org, a defense think tank. “Maybe they were just planning on using their air force for air shows.”

Daily Yglesias link.

On monetary policy. Now for something completely different. I think that M Yglesias gets it exactly right in this post.

Inflation Expectations Creeping Up

though [inflation] expectations are now moving in the right direction, they’re still lower than would be optimal. It’d be nice to see expectations pushed all the way up to Reaganesque levels in the 4 or 5 percent range, but even if that’s unrealistic ten year expectations could at least get above two.

I comment

I think you are absolutely totally utterly right. Avent is just looking at the sign. The staggered announcement and current implementation of QE2 is associated with a change of inflation expectations in a desirable direction, but the change is tiny compared to a change which would make up for the lack of fiscal stimulus. Amounts matter not just signs.

I'd add that QE2 is also associated with an increase in medium term nominal interest rates including notably 7 year rates (QE2 is the purchase of 7 year Treasury notes so this is the natural interest rate to check). The bottom line is much less association with lower real interest rates than with higher expected inflation. Bummer.

I'm sure part of the problem is, as you suggest, the inflation hawks which make investors fear that the Fed will respond to the menace of inflation in the target range by causing positive short term safe interest rates.

But the main point (your main point) is that inflation hawks are totally wrong twice. Increased expected inflation is good and expected inflation is barely increasing. When noting the first error, one shouldn't overlook the second.

Matthew Yglesias has gone too far this time.

He reads a report on the effect on 2 year Treasury yields of public speaches and interviews of Fed Open Market Committee members measured by the change from 15 minutes before the announcement to 2 hours after. It finds effects on the order of one basis point per announcement. The average absolute effect of Bernanke's communications is 1.5 basis points, that is 0.015% on one interest rate definitely lasting at least 2 hours (and maybe forever or growing or something).

Yglesias concludes "I think this highlights the fact that monetary policy works largely through expectations and communications ...". If monetary policy works largely through effects on medium short term interest rates on the order of a basis point, then it doesn't work at all. This is, pretty much, my view of the current situation. I have the radical idea that monetary policy in a liquidity trap is almost ineffective.

The alarming thing is that Matthew Yglesias who is very very very smart, doesn't seem to have noticed the scale of the graph at all. He doesn't distinguish "detectable" from "important." His comment shows no effect at all of quantities.

I feel as if his evil (really innumerate) twin Skippy takes over when he writes about monetary policy.

Today's comment on Yglesias.

He's tromping all over my turf.

He went out of his way to say he isn't worried about financial arson. He taught me something I should have known (I should have read the article and should have thought of it myself). I could unfairly attack him by ignoring his use of the qualifier "could" in a, just to be polite, qualified concession "to be fair" to those with whom he disagrees. I could pretend that he really believes that that which he concedes "could" be true, definitely is true.

So I will.


Fascinating post. Thanks for telling me about the Gorton article.

I do think that Gorton is trying very hard to be as orthodox as possible. Effectively he assumes that the semi strong form efficient markets hypothesis is true. He notes that, even if CDS prices move only in response to valid information, they might cause problems.

In the real world another issue is that asset prices bounce around for no good reason. This means the cost of speculation in liquid assets include those described by Gorton plus many more. The part of the post which doesn't convince me is "In the long-run, the availability of naked CDS and therefore more information about firms could be a good thing that enhances the operation of the economy." This is only true if CDS prices are based on information and not noise, bubbles, panics, fashion and well all the things which really make asset prices bounce around.

CDS played an important role in the economy before the crisis. Firms designing and rating CDOs used the correlation of different CDS prices to estimate the risk of default of tranches of the CDO. This is using information in CDS prices. It didn't work out well. The "information" was noise and it caused a gross underestimate of the probability of joint default of different underlying bonds (of the correlation of the default events). Now the problem was partly that the same firm designed and rated CDOs creating massive conflict of interests. It was largely that the calculations were performed with the absurd assumption that all stochastic variables are jointly normal.

But the fact remains that use of the alleged information in CDS prices, impaired the operation of the economy. Massively.

Gorton's point is that, even if the semi strong form efficient markets hypotheses were valid, new liquid assets can make things worse. This is an impressive result, but there is no reason to take the semi strong form efficient markets hypothesis seriously as it fits the data about as well as the flat earth hypothesis.

The Gallup Poll on the Budget Deal is Very Interesting

It has been discussed by Krugman, Klein and Drum.

It shows that the Republican Party has this little problem that most US adults and most independents absolutely disagree with them. 59% of US adults overall and 60% of independents want congress to increase taxes on families with incomes over $250,000.

Same old same old. This is a very typical result. That's why Congress hasn't done so since 1993 (when the fraction thinking the rich paid les s than their fair share was around 80%). The Republican proposal to make Bush tax cuts permanent and then slash taxes for the rich a whole lot more does not look popular. 37% of self identified Republicans want to increase taxes on the rich.

Just a little bit of discussion of actual cuts have eliminated the US enthusiasm for cutting domestic spending. US adults split 47% against further significant cuts to 45% in favor. 48% of independents oppose singificant additional cuts (as just proposed by Obama by the way).

13% want a complete overhall of Medicare. 14% of self described Republicans support a complete overhall. Ryan hasn't won over a signficant minority of his own party.
The result which amazes even the most jaded Republican moccker is that 33% of Republicans things the governement should "not try to control the costs of Medicare." I admit I am surprised too, but we shouldn't be. The Republicans shellacked the Democrats because their base turned out to punish the Democrats for trying to control Medicare costs.

But the really interesting question is how could a party with a death wish win so many elections. I think the reason is that self identified Democrats don't consider Republicans the enemy and self identified Republicans consider Democrats the enemy. An extremely partisan base is good for a party.

The result I found most interesting was one so tackily horse racy that pollsters rarely ask it. Who won ?



Democrats just won't paly this game with many more calling it a "victory for both" than a victory for just one party. In contrast more Republicans consider the result to be a victory for one party rather than for both.

Democrats are sure that Republicans and Democrats can work together for the common good. 20% of self identified Democrats even think the parties did so in the with the horrible job destroying continuing resolution. Republicans are less likely to think this.

I think that's why the Republican party wins elections even though ordinary Republicans oppose the party's agenda.

This works especially for mid term elections and fighting over who won the election.

Kepler

I am continuing my posting as an amateur historian of science. This post will be alll from memory -- no links and certainly no references to actual historical evidence.

He had 4 claims the fourth of which is, by far, the most astonishing.

1. Planets (including the Earth) move on ellipses with the Sun at the focus. The Moon moves on an ellipse with the Earth at the focus. This is a very radical claim. All previous Western astronomers worked only with circles. The path of the planets is close to a circle centered on a point near the sun (a not very eccentric ellipse is very close to a circle centered on the point midway between the foci). Only much more measurements (made by/under the supervision of Tycho Brahe) made it possible to show that the path wasn't an off center circle.

It is possible to approximate and ellipse very well with a big circle and an epicycle. This is what Copernicus did. His epicycles were tiny, because the orbits of the planets happen to be ellipses with low eccentricity -- that is very close to circles.

2. Angular momentum is conserved. Take the vector from the sun to a planet. The cross product of that ray and the velocity of the planet is constant. To put it in terms Kepler would understand, the product of the distance to the sun and the planet's motion in the directino perpendicular to the line segment from the sun to the planet is constant. Kepler really only noted this (in a diagram which I remember seeing a photo of it somewhere) for positions near the perihelion and near the apehelion (sp ?). It means that if you make a triangle of the Sun, the planet at time t and the planet at time t+x then the area depends on x but not on t.

This means that the angle swept out per unit of time is not at all constant when viewed from the Sun. It is proportional to the inverse of the square of the distance from the Sun to the Planet. Taking first order approximations (which are very close to accurate since the ellipses have low eccentricity) the angle swept out in a unit of time is almost exactly constant when viewed from the *other* focus of the ellipse. This means that planetary orbits are very nearly circles centered on a point other than the sun (the point midway between the foci) and that angle swept out is very nearly constant when viewed from the point twice as far from the Sun (in the same directin). This means that Ptolemy's system of eccentrics and equants is almost exact. Copernicus's conviction that motion must be constant when viewed from the center (of the circle) has nothing to do with reality.

So far I score it Copernicus 1 Ptolemy 2. On one point of disagreement (does the Earth stand still) Copernicus was right. On two points eccentrics and equants, Ptolemy was ahead of Copernicus. On the point of agreement -- perpetual motion must be circular, they were both wrong.

I am being generous to Copernicus, because I have skipped Brahe. Brahe had a compromise model in which the Sun and the Moon orbit the Earth and the other planets orbit the Sun. Brahe's model can't be distinguished from Copernicus's model by astronomical observations. If he had been a loyal employee/student Kepler could have Braheed his model with the Sun oribiting on an ellipse with the Earth at its center and the other planets oribiting on ellipses with the Sun at the center.

The only reason we are sure such a model is wrong is that it is inconsistent with Newton's theory of gravity which -- well that was a megagigantic huge very large scientific advance and just fits so many facts that the only way to remember them is to remember that Newton's model worked perfectly except for the precession of the parihelion of Mercury.

3. I have to redo the math each time working back from Newton. OK the square of the period of the planet is proportional to the cube of the average distance from the sun to the planet.

Stylized facts 1, 2 and 3 are all implied by Newton's theory of motion and of gravity.

So what is the really amazing fact 4 which is much more impressive than 1-3 and such that it just strains credulity to argue that it is a coincidence ?

There are only five regular solids: tetrahedron, cube, octahedron, dodecahedron and icosahedron (sp?). This is an easily proven yet still amazing fact in geometry.

There are six planets visible to the naked eye mercury, Venus, Earth (ha ha you looked) Mars, Jupiter and Saturn. If you make spheres including the circles which approximate their orbits (Copernicus's model without the epicycles) then the following amazing fact is true.

The corners of the smallest tetrahedron which includes the sphere of Mercury just touch the sphere of Venus.
The corners of the smallest cube which contains the sphere of Venus just touch the sphere of the Earth.
The corners of the smallest octahedron which constains the sphere of Earth just touch the sphere of Mars.

you get the picture.

This hints at an explanation of why there are 6 planets, since there are 5 regular solids to be between the orbits of successive planets. It also fits 5 numbers with no free parameters at all.

Any sensible rule of statistics or science or common sense must imply that one has to be a total idiot, insane or very very stubborn to assert that this is just a coincidence which tells us nothing.

The consensus view of basically all living people is that this is just a coincidence. Almost nobody knows the fact. It clearly can't tell us about physics, because it depends on the word "visible." There are other planets. If we had better eyes, then Kepler would never have noted the patter. If we had worse eyes and couldn't see Saturn (or mercury or something) then Kepler would never have noted the pattern

It is an amazing astonishing hard to believe it is a coincidence statement simultaneously about the Solar system and the sensitivity of the human eye.

Maybe it was a weird coincidence.

Another possibility is suggested by the Church of the God with a Sick and Twisted sense of Humor. This weird fact could be explained if He was Messing with Kepler's mind.




To recap

Peolemy: Ptolemy wrote down a model which was used to forecast 1350 years out of sample. For some reason, this gigantic scientific triumph is used as an example of bad science. The problem, as everyone thinks they know, is that clinging to the core belief that orbits were made of circles, Ptolemaic astronomers added epicycle after epicycle, pleased that they had reconciled the data with the claim that orbits could be approximated with enough circles and not noticing that any curve can be so approximated. This, first of all, sounds a whole lot like economic reasearch to me and second of all would clearly be bad science. The problem is that there is absolutely no historical evidence that Ptolemy's followers added an additional epicycle to his model.

I learned something recently. I thought they added eccentrics and equants. Now I know that Ptolemy had them in his model, and that they were used long before Ptolemy.

Copernicus: Copernicus was a pro-circle hard liner. His stated aim was to make a model without equants. OK I have to define. In Ptolemy's model something goes around a circle, but the rate at which it goes around is not constant when viewed from the center of the circle but rather from another point called an equant. This was not acceptable to Copernicus. I don't think we can understand why not (we can't read his mind).

The Copernican model had epicycles. It also suggested that they might not be necessary as Copernicus's epicycles were tiny.

What's this about 50 years ? Well for around 50 years after Copernicus published, no one was convinced. Then two things happened. One is that Galileo observed the phases of Venus with a telescope. That mean't he could estimate the angle between the line from the Sun to Venus and from Venus to the Earth. That angle corresponded very closely to the angle predicted by Copernicus and not at all to the angle predicted by Ptolemy. After 1450 data were observed which Ptolemy's model couldn't fit (to the stated precision of around a degree or so).

Second, Kepler published. Kepler's model is heliocentric and it gives predictions which are almost exact. Measurements precise enough to reject Kepler's model weren't available for centuries. Both Ptolemy and Copernicus admitted that their model didn't give exact predictions (which means forecasts errors can be detected with the naked eye).

Copernicus's model had very limited appeal and this makes sense. It gave predictions about as good as Ptolemy's and was about as complicated as Ptolemy's. New data showed it corresponded more closely to reality. Also a new model which we perceive to be similar to Copernicus's model was far superior to the models of Copernicus and of Ptolemy.

OK finally what did Kepler say ?

I've moved it up to before recap of Ptolemy and Copernicus so now it is at the top of the post and probably incomprehensible.