Karl Marx didn't feel the Bern in 1875

The democratic socialist Bernie Sanders says that higher education should be provided without tuition. What did socialist Karl Marx think of that ?

"Universal compulsory school attendance. Free instruction." The former exists even in Germany, the second in Switzerland and in the United States in the case of elementary schools. If in some states of the latter country higher education institutions are also "free", that only means in fact defraying the cost of education of the upper classes from the general tax receipts. Incidentally, the same holds good for "free administration of justice" demanded under A, 5. The administration of criminal justice is to be had free everywhere; that of civil justice is concerned almost exclusively with conflicts over property and hence affects almost exclusively the possessing classes. Are they to carry on their litigation at the expense of the national coffers?

Yep he said that free higher education was a total scam. Karl Marx against Bernie Sanders. Also note that back in the day (1875) there were 0 tuition universities in the USA. With progress like this the USA will have a god-Pharoah by 2075. And how about that tort reform ? The GOP wouldn't dream of making plaintiffs pay judges for their time, but Karl Marx went there (OK he was there it was the way things were back then).

On Delong at Huffington

This is my comment on Brad DeLong's article in the Huffington Post.

I think the Huffington post editor might have cut out a key paragraph. In the article as edited there is no description of an overhang until remedies are discussed

"What we need now is 1) debt relief to unwind the overhang and 2) much tighter financial regulation to prevent the growth of new fragilities. And if those prove inconsistent with full recovery, then we need massive government spending on infrastructure and other investments financed by money printing until full employment is reattained."

http://www.huffingtonpost.com/brad-delong/global-economic-depression_b_8924596.html?1452263364

It isn't clear exactly which overhang you had in mind. I assume it is household debt as you wrote somewhere that you have been convinced by Mian and Sufi.

I don't know if this is due to the ruthless Huffingediting, but I have 3 problems with your proposals.

1) I strongly object to the word "then". As written it implies that fiscal stimulus should be used only after debt relief is tried and fails. Ignoring the political impossibility of fiscal stimulus (on the grounds that debt relief is also politically impossible) I'd argue for fiscal stimulus now. Even if debt relief works, it will take time. I am ignoring politics so I assume Congress acts tomorrow, but even then (tomorrow) it will be slow and messy. Unlike bankers, ordinary people don't promptly find out about available subsidies and grab them. Relief for the banks took time. Under the most optimistic forecast there should still be slack demand (at a Federal funds rate of zero) for over a year -- time for fiscal stimulus to help.

2) We need massive government investment. It doesn't have to be financed with money printing. I think it makes almost exactly difference if it is financed with money or T-bills -- money and T-bills are still essentially perfect substitutes. I think it makes very very little difference if it is financed with money or 7 year treasury notes. I note the lack of evidece for a correctly signed effect of QE-II. Finally, I think it makes almost no difference whether it is financed with debt or taxes on capital income or high labor incomes. I note that monetized deficits are taboo and deficit spending is unpopular while higher taxes on the rich are popular (supported even by a substatial minority of self declared Republicans).

3) I am not sure what the effect of debt overhang is supposed to be. You often print your NIPA graph of components of aggregate demand and note that the shortfall is in housing investment and public consumption and investment. The abnormally low public investment tends to suggest to anyone who doesn't think it was way to high in the past, that it should be increased even if the social cost were ordinary (that is aside from your macroeconomic consideration). For public investment, the relevant debt overhang is state and local government debt. Bond markets tell us that Federal debt is a political not an economic problem.

So I guess you think that housing investment is lower than it should be due to excessive household debt. Yes that is a value judgment (your proposals must be intended to change things from the way they are to the way they should be). Your value judgment is based on the assumption that US housing invesment was the way it should be back in 2000 before the bubble. I remain unconvinced that 2000 was before the bubble. I think demand for houses back in 2000 was based on irrational beliefs about house price appreciation which couldn't last forever -- that is I think there was a housing buble back then too. I think it started in the 1970s. What if Shiller is right and there isn't a long term trend in (house prices)/(consumer price index, people have incorrectly believed for decades that there is, and people now believe there isn't ? Then it is possible that curent levels of housing investment are the new normal and other sources of aggregate demand must be found. I think it is entirely possible that housing investment in the 80s and 90s was due to a bubble which couldn't last forever, but did last an extraodrinarily long time, because the people extrapolated a trend in a relative price which they didn't observe.

I'm not convinced there is anything abnormal in US aggregate demand except for low government consumption plus investment.

This is too long already, but I note that I agree with mwilbert and dilbert dogbert (in comments here ) that there seems to be a trend in prime age labor force participation which is not just due to low aggregate demand and discouragement. I the issue is that some people who are classified as prime age don't feel that they are in their prime (increasing numbers claim to be disabled). Now this is horrible for those of us who left prime age in the past year but it's in the data. Prime aged adults are aging and labor force participation has always declined some well before people had any business thinking about retiring (stop Robert you have to actually work in, like, a real job before you can retire). There is no need to look only at such a simple statistic as the prime age employment ratio. It is possible to regress labor force participation on year dummies and a flexible function of age and look at the coefficients on the year dummies. This has been done and it makes a difference.

Also I think Krugman (as usual) shares some of the credit for getting things right. He argued that this is not our father's recession and contrasted inflation fighting and bubble bursting recessions. Your (brilliant) look at every 4th year univariate analysis of GDP didn't take into account the fact that the Fed was slamming on the brakes then on the gas in your sample. A normal recovery included a dramatic decline in the Federal Funds rate. Stiglitz wasn't the only one who noted that wasn't going to happen in 2009.

E-mail is the work of the Devil

Ross Douthat's Sunday Column

I blame Josh Barro who tweeted a link to this column. So I started to read it. Note to self -- don't Do that.

So I fisk.

"MAYBE Donald Trump is doing us a favor.

The United States has long been spared a truly authoritarian element in our politics. Since Southern apartheid was crushed and far-left terrorism died away , we’ve had very little organized political violence, and few homegrown movements that manifest the authoritarian temptation."

Far right terrorism with no explicit link to Southern apartheid has long (I think always) been stronger than far left terrorism. The "far-left terrorism" is a mixture of Ballance and determination to keep the affirmative action for Republicans advantage.

"Yes, our political institutions are creaking, and our presidency is increasingly imperial. But there are still basic norms that both parties and every major politician claim to honor and respect."

The presidency is much less imperial than it wsa 8 years ago, when the administration explicitly asserted that the president was above the law ("when acting as commander in Chief") when the president claimed the authority to have US citizens arrested in the US and held indefinitely without trial or access to counsel, & when the president claimed the authority to establish special tribunals by executive order without even the pretense that the order was executing a law. Here Douthat wrote something absurd and plainly false, because he has to write it to claim he is a Republican and has a right to be a token Republican on the NY Times opinion pages.

"What Trump is doing, then, is showing us something different, something that less fortunate countries know all too well: how authoritarianism works, how it seduces, and ultimately how it wins.

But — God willing — he’s doing it in a way that’s sufficiently chaotic, ridiculous and ultimately unpopular that he will pass from the scene without actually taking power, leaving us to absorb the lessons of his rise."

I note the logical inconsistency between saying Trump shows how authoritarianism wins and the hope that he is incompetent so his authoritarian effort will lose. It can only mean that the way authoritarianism wins is by being "chaotic, ridiculous and ... unpopular". I think this is the most charitable possible interpretation of Douthat's reasoning.

"That rise has four building blocks. First, his strongest supporters have entirely legitimate grievances. The core of that support is a white working class that the Democratic Party has half-abandoned and the Republican Party has poorly served — a cohort facing social breakdown and economic stagnation, and stuck with a liberal party offering condescension and open borders and a conservative party offering foreign quagmires and capital gains tax cuts. Trump’s support is broader than just these voters, but they’re the reason he’s a phenomenon, a force."

The Democratss offer closed borders with a very high rate of deportations (record level ?) and negative net migration from Mexico. Douhat must know this, but I think he considers noting inconvenient facts to be "condescension". Of course he can effortlessly make the case that Republican policies are bad for the working class (white and non-white) but he can only make a plainly utterly false assertion on a matter of fact and link to a necessarily subjective assessment of tone to make the case against the Democrats. He knows this and it doesn't matter. He is trying to participate in the debate within the GOP. False assertions on the increawsingly imperial presidency and open borders are part of the admission fee.

"Second, you have the opportunists — the politicians and media figures who have seen some advantage from elevating Trump. The first wave of these boosters, including Ted Cruz and various talk radio hosts, clearly imagined that Trump would flare and die, and by being in his corner early they could win his voters later, or gain his fans as listeners. But the next wave, upon us now, thinks that Trump is here to stay, and their hope is to join his inner circle (if they’re politicians), shape his policy proposals (if they’re idea peddlers), or be the voice of the Trump era (if they’re Sean Hannity).

There is no real ideological consistency to this group: Trump’s expanding circle of apologists includes Sarah Palin and Steve Forbes, Mike Huckabee and Chris Christie; he has anti-immigration populists and Wall Street supply-siders, True Conservatives and self-conscious moderates, evangelical preachers and avowed white nationalists. The only common threads are cynicism, ambition and a sense of Trump as a ticket to influence they couldn’t get any other way.

Then third, you have the institutionalists — less cynical, not at all enamored of Trump, but unwilling to do all that much to stop him. These are people who mostly just want Republican politics to go back to normal, who fear risk and breakage and schism too much to go all in against him.

The institutionalists include the party apparatchiks who imagine they can manage and constrain Trump if he gets the nomination. They include the donors who’ve been reluctant to fund the kind of scorched-earth assault that the Democrats surely have waiting. They include the rivals who denounce Trump as a con artist but promise to vote for him in the fall. They include Republicans who keep telling themselves stories about how Trump will appoint conservative justices or Trump is expanding the party to pretend that Trump versus Hillary would be a normal sort of vote. And they even include the occasional liberal convinced that Trump-the-dealmaker is someone the Democrats can eventually do business with.

" I actually agree with these 4 paragraphs.

"Then, finally, you have the inevitabilists — not Trump supporters, but Trump enablers, who encourage the institutionalists in their paralysis by acting and talking as if the support of 35 percent of the primary electorate means Trump Cannot Be Stopped."

Actually 43%. Also I read only that he will be unstoppable if nothing changes before the ides of March are passed. Douthat doesn't quote an inevitabilist. He can't, because although there are preople who are confident that Trump won't be stopped all know he could be (if the voters unanimously decide to stop him he will be stopped). Douthat set up a straw man who made an absurd claim.

Some inevitabilists are intoxicated with celebrity and star power. Cable news is riddled with such voices, who daily manifest Orwell’s dictum, “Power worship blurs political judgment,” so that, “Whoever is winning at the moment will always seem to be invincible.”

Does the NY Times have copy editors ? Douthat used quotation marks without quoting anyone in particular. He asserted that someone said those words in that order (and no others note no ellipses). The quoted words are a claim of fact, whihc should be checked. Douthat should be forced to retract his claim if he can't proves someone said each of those things. Also note how the (falsely alleged) claim that someone "seems invincible" is used to support the (unsupported) claim that someone thinks Trump is invincible. It seems that Douthat does not understand the difference between to be and to seem to be.

"Others, especially in the intelligentsia, have a kind of highbrow nihilism about our politics, a sense that American democracy’s decadence — or the Republican Party’s decadence, in particular — is so advanced that a cleansing Trumpian fire might be just the thing we need.

I have a little bit of the last vice, which is why I spent a long time being anti-anti-Trump: not rooting for him to win, but appreciating his truth-telling on certain issues, his capacity to upset the stagnant status quo.

Which is the way it so often works with authoritarians. They promise a purgation that many people at some level already desire, and only too late do you realize that the purge will extend too far, and burn away too much."

OK Ross Douthat has finally named one of the fools tempted by authoritarianism. He is named Ross Douthat. I can't contradict Douthat's claim that he is a fool who plays with fire. He would know.

"Fortunately Trump’s fire should still be contained, by the wider electorate if not by his hapless party. Fortunately he’s still more a comic-opera demagogue than a clear and present danger. Fortunately this is just history giving us a lesson in what could happen, how the republic could slide into a strongman’s hands.

" Fortunately."

A bit weak on "should" and "shall" isn't he. I suppose that given this column, Douthat has decided to vote for Clinton or Sanders rather than Trump. But he didn't write that did he ?

The Republic is in Danger. Yesterday the American Caesar Surpassed the Rubio-Cons

Don't you hate it when you have a great title and no post to go with it ?

Christie on Trump

Endorsing Trump Chris Christie said

Christie argued that Trump has the executive experience necessary to be president. "This is only guy on the stage, other than Gov. Kasich, who made executive decisions, made executive decisions throughout his life," Christie said. "Who put together budget and makes sure money is spent efficiently and effectively in order to create profit, and would make sure the country moving forward would get on that kind of track. This guy knows how to do that better than anybody on that stage."

Now I always considered profit and bankruptcy diametric opposites as in profit>loss>bankruptcy, but, given New Jersey's current credit rating, I guess I understand the sense of sympathy. Trump & Christie the insolvency caucus (but why hasn't Jindahl joined ?)

Still Grinding Old Axes After All These Years

I have been arguing with Political Animals about Welfare Reform for years. It started when Ed Kilgore wrote

TANF costs and caseloads were intended to go down in no small part because the other safety net programs, along with the extremely important earned income tax credit (EITC) were intended to pick up the slack. And that’s why the GOP proposals are so devastating: they knock the very props from beneath the effort to “make work pay” that was more important than state generosity in TANF rules or funding in making welfare reform work as well as it has.

The problem is that the extremely important increase in the EITC was enacted in 1993 and had nothing to do with the 1996 welfare reform bill. There was no need to accept the time limits, block granting, elimination of food stamps for legal immigrants or elimination of food stamps for adults without children in order to obtain the EITC increase. the EITC increase was current policy when the welfare reform bills reached Bill Clinton's desk.

A former deputy assistant secretary of the treasury who shall remain nameless remarked "oh how embarrassing."

Ed Kilgore has corrected his error more recently writing

"the EITC that had already been greatly increased long before the third welfare bill hit his desk. "

(Clinton vetoed the first and second welfare reform bills to hit his desk).

But now Bryce Covert reports

"The Clinton campaign responded to Sanders’ attack on Wednesday, pointing out that welfare reform came as a package of measures and highlighted the inclusion of the Earned Income Tax Credit for low-income families"

The claim by the (un-named) source is totally false nonsense. The 1996 welfare reform did not come as a package of measures including the 1993 increase in the Earned Income Tax Credit. They were not part of the same package at all. The 1993 bill was passed with zero Republican votes. The 1996 bill was written by a Congress with Republican majorities in the House and the Senate.

The claim that the two reforms were a package is totally 100% false. I guess some campaign staffer who was a child in 1993 might be honestly confused, but Hillary Clinton knows the claim is false and should correct her spokesperson.

Final note: I don't regret voting for Clinton (by e-mail) in the 2016 Massachusetts Democratic primary.

Welfare Reform Againnnnn

I often bore myself. I have been arguing with political animals about the 1996 welfare reform bill for years now.

It started with Ed Kilgore (now at New York Magazine)

Then original political animal Kevin Drum discussed it at motherjones.com and I threw a political cow

Now Nancy LeTourneau wrote "Let’s Talk About Welfare Reform"

She writes a lot of interesting and reasonable things (it is probably best to just click the link). She also copied Kevin Drum's graph *and* his crazy claim that a 50% increase is small. I will just steal the graph and link to Drum.

I commented

This will be my usual comment. I have written often on the topic in this comment box (because Ed Kilgore wrote something about welfare reform). The green curve Drum highlighted in the graph you posted suggests massive damage due to the 1996 bill -- the percentage of households with children living with less than $2 per capita per day has increased by 50% (=0.5 percentage points) since 1996. This is a huge increase indicating a huge number of additional people suffering third world poverty (when as is correct SNAP is included).

The curve looks roughly horizontal because the number was and is so much lower than the other numbers (say excluding food stamps/SNAP) that a huge proportional change looks tiny.

Similarly, if you had put the percentage of people murdered in a given year it would look perfectly flat (also in 2001). The graph shows that, correctly assessed, the welfare reform bill was no huge deal if and only if you consider 9/11 no biggie.

A 50% increase in poverty so severe we consider it horrible in the third world is not a minor change.

I object to somethign LeTourneau wrote "Understanding all of that, we can then talk about what an effective anti-poverty agenda would actually look like. Rather than assume that it means going back to the old AFDC model, it would include two things:" To assume that critics of the 1996 bill propose exactly repealing it and ask if that the perfect policy is to set up a straw man. You decide to ascribe one exact proposal to us (without citing anyone) and contrast it with open ended proposals. Also arguing agings "assuming" is always and invariably setting up a straw man. I don't think such rhetoric is effective and I think it lowers the level of debate.

Finally, on the comparison, I think (really guess based on near total ignorance) the recent evidence suggests that just giving cash is more efficient than giving advice via social workers. I'd consider "housing first" and the homeless and long term inter-generational effects of food stamps. The amount of money involved (say the amount to eliminate the 1.5% rate of extreme severe third world poverty) is tiny compared to the US budget.

Electability

First I don't just think that Democrats should think about which presidential candidate has a better chance of winning -- I think Democrats should think only about which presidential candidate has a better chance of winning. Clinton and Sanders are very different. A Clinton administration and a Sanders administration will be very similar to each other and to Obama post 2010. In contrast a Trump, Cruz or Rubio administration would be a catastrophe.

All we need is a president with five fingers who can veto bills.

This reasoning caused me to vote (by e-mail) for Clinton, but I am not confident that I made the right choice. I can make the argument that Sanders is more electable. I can also argue that a Sanders nomination would be better for down ticket Democrats.

I wouldn't base it on general election polls which show Sanders performing slightly better than Clinton. I think these polls tell us nothing about what a GOP negative campaign would do to Sanders. But I sometimes think that the one key variable is youth turnout -- when young people vote Democrats win, when young people don't vote Republicans win. Young Democrats prefer Sanders. I am confident that a larger fraction of young Democrats will actually vote if Sanders is the nominee. Youth turnout is more important that campaign cash for Democratic candidates for the house, senate and state legislatures.

I am not convinced by this argument, I voted for Clinton. But it makes some sense.

Once Berned Twice Shy

A majority of young Democrats support Bernie Sanders. A majority of not so young Democrats support Hillary Clinton. The generation gap is not surprising at all. People tend to move right as they age. Older people note that we have learned to compromise and deal with reality. Younger people note that we have become cynical and lost the audacity of hope. But the question is why is the generation gap more marked now than it was in the 80s and 90s. I'm old enough to remember a *real* generation gap. I remember 1972 (I even remember 1968). One explanation of the Sanders phenomenon is that people under 30 don't remember the USSR and associate the word "socialism" with Sweden not Stalin. I think another explanation is that young people don't remember 1972. I'm a late boomer (1960) and have long been very irritated that the leaders of the Democratic party are older than me people who can't get over the mistake of supporting McGovern in the 1972 primaries. Now I know how they feel. I am sure that Sanders if vulnerable to a negative campaign accusing him of being a socialist (which would have the additional advantage of being true). I don't trust the early general election polls at all.

Beating a Dead Fish In a Barrel

I believe that if Osama bin Laden had been killed, Al Qaeda as an organization would not have grown to the point where it could have conducted 9/11," Rubio said. "And my argument was, no, the responsibility of 9/11 falls on the fact that Al Qaeda was allowed to grow and prosper and the decision was not made to take out the leader when the chance existed to do so."

Marco Rubio 2016

"I want you to kill Bin Laden"

Bill Clinton 1998 (quoted by Richard Clarke in "Against all Enemies"

About 75[24][3] Tomahawk cruise missiles were fired by the U.S. into the Islamic Emirate of Afghanistan at four Afghan training camps:

Al Farouq training camp[25]

Muawai camp run by the Pakistani Harkat-ul-Mujahideen to train militants to fight Indian troops in Kashmir[26][27]

Zhawar Kili al-Badr, which was directed by bin Laden, and known to be a meeting place for leaders.[28][29]

The attack was made partly in an attempt to assassinate bin Laden and other leaders.[30] After the attack, the CIA heard that bin Laden had been at Zhawar Kili al-Badr but had left some hours before the missiles hit

Wikipedia

Donald Trump GOP nominee

I have tried to avoid making predictions since 2004 when I predicted that Kerry would be elected, but now, as a result of the overwhelming evidence reported below, I can't honestly claim to doubt that Donald Trump with be the 2016 GOP nominee

Does Ed Kilgore Have to Repudiate Ed Kilgore

I can't resist grinding old axes. I assert that Ed Kilgore really really should formally and explicitly repudiate something he wrote and publicly apologize to Jason DeParle.

The absurd argument that this discussion has any current relevance (which I don't make) is based on this relatively recent post from last May "Does HRC Need to Repudiate Welfare Reform?"

Kilgore answers that she doesn't, and I absolutely agree. I would go further and argue that Clinton must not repudiate welfare reform, since that repudiation might cause the election of a Republican. I think she must refrain from all criticism of the 1996 welfare reform bill. One important reason (among many others) is that by avoiding the topic during the campaign she increases the chance that she will be able to undo some of the damage.

Kilgore is (explicitly) discussing politics not policy -- the optimal presidential campaign not the optimal welfare policy.

But he is not willing to just leave it at that. He argues that welfare reform would have worked better if it were not for George Bush here

"Of course the ability to get people intro entry level jobs and into some sort of upward mobility depended heavily on what happened to the EITC, Medicaid, SNAP and many other elements of “making work pay” during a less than supportive Bush administration!"

So what happened to EITC, Medicaid, and SNAP under Bush ? Well there was a large increase in the child tax credit, which is very similar to the EITC. Medicaid and SNAP were not changed. The claim that problems with welfare reform are Bush's fault is completely unsupported by any evidence, because there is no evidence to support it. It is a red herring.

Also Kilgore doesn't discuss the 1996 welfare reform bill and SNAP (then called food stamps). The program was ruthlessly slashed by the 1996 bill. The vast bulk of the forecast reduction in social welfare spending was due to cuts to food stamps and not to the transition from AFDC to TANF. In particular one provision of the bill was that food stamps were not supposed to be provided to adults without children. This means they were supposed to get nothing at all no matter how poor they were (obviously they get neither AFDC nor TANF).

Kilgore mentions SNAP when arguing that the welfare bill was not so bad, because he has forgotten the text of the bill. I note in passing that I lived in Italy, didn't surf the web and didn't subscribe to a US newspaper at the time. I learned everything I know about the 1996 bill by reading The New Republic in 1996.

However, he is making progress. In 2012 he wrote

the biggest problem with the “welfare reform has failed” narrative, and with treating the Ryan budget as a logical extension of welfare reform, is that it ignores one of the main purposes of the 1996 act was to make other elements of the safety net, some work-conditional and others simply much better targeted, more central, even as they were significantly strengthened. As Elaine Kamarck explained at Ten Miles Square back in September of 2011:

[T]he intent of welfare reform was to move as many Americans as possible off the welfare rolls, which, by supporting mothers only if they weren’t working and weren’t married, created lamentable behavioral incentives. The goal was to see them then move into either the work world or the arms of other government programs that offer more targeted forms of assistance. In both respects, the law has been a success. No doubt the safety net needs shoring up. But even in these tough economic times, it is providing much more of a cushion for the kinds of families that once relied on welfare than its critics seem to realize. In today’s WaPo, Ezra Klein takes a different tack in suggesting that welfare reform’s record is an accurate yardstick for how the Ryan budget might work out: since Ryan (and for that matter, in his own proposal, Mitt Romney) wants to turn Medicaid, food stamps and other safety-net programs into state-run block grants, it’s important to look at how states have cut TANF to see how they might handle these other programs.

Ezra’s right about that, but like Paul Ryan, he’s mixing apples and oranges: TANF costs and caseloads were intended to go down in no small part because the other safety net programs, along with the extremely important earned income tax credit (EITC) were intended to pick up the slack.

In 2015 he correctly wrote

is Clinton’s record on “poverty and the safety net” entirely reducible to the 1996 welfare law? Definitely not; you could make a pretty good case that Clinton’s whole strategy was to shift the emphasis from wildly unpopular, inadequate and state-controlled cash assistance to other, federally controlled income support mechanisms, including the EITC that had already been greatly increased long before the third welfare bill hit his desk.

So the 1993 EITC expansion has changed from being one of the "main purposes of the 1996 act" to something which happened long before.

In 2012 Kilgore was writing based on an incorrect recollection of the events. He accused Klein of mixing apples and oranges because he Kilgore and not Klein insisted on mixing apples and oranges and assuming that 1993=1996.

Kilgore should update his 2012 post to note his error. He should also try to revise the argument he made in 2012 to see if it can still stand without the support of the false claim of fact. I think it is very clear that it doesn't and that recognition of the undeniable facts of history makes it impossible for Kilgore to defend his 2012 conclusions. Note the absense of any argument that the 1996 reform was an improvent in the 2015 post which mostly argues that discussing it is bad politics (I agree) and that it is no big deal (I passionately disagree).

I also think that Kilgore owes Exra Klein and Jason DeParle apologies and that he should make those apologies both in person and publicly.

But mostly I think he really has to stop mixing discussion of politics and policy. He can discuss political strategy without discussing the effects of hypothetical policy reforms (especially those which are politically impossible). But he just can't resist. He also has trouble refraining from linking to Elaine Kamarck who has trouble sticking to policy analysis.

I think it has finally become very clear to Kilgore that the 1996 welfare reform bill was bad policy. He clearly stongly believes that it is a topic which Democrats should avoid (so does Bernie Sanders). But he can't resist attempting some argument that, back in 1996, the lefties who disagreed with him weren't entirely right. He can't make a counter argument (he didn't try in 2015) but he can't either force himself to concede (which is painful) or discuss political strategy only without trying to hint that we weren't right about policy back in 1996.

Predictions

I try to avoid making predictions. I have tried harder since November 2004 when I predicted that John Kerry would be elected. But on Monday, Fabrizio Mattesini pulled a prediction out of me -- I predicted that Marco Rubio would not be the Republican nominee. This was after the debate. This was after the debate. This was after the debate. This was after. But really, it was obvious, at least, that Rubio would do terribly in New Hampshire. The evidence, amounting to proof, is

via vox

Back to the 60's Phillips Curve ?

I have been postponing posting this post. Now it is a bit late as it is, I think, strictly inferior to Nick Bunker's post "Context may be everything when it comes to the Phillips curve" which you should probably just read. Both are mainly comments on Olivier Blanchard's Peterson Institute for International Economics policy brief (pdf) "The US Phillips Curve: Back to the 60s? " which itself is largely based on Blanchard Cerutti and Summers (2015) (which he cites).

Blanchard analyzed US unemployment and inflation with a model including time varying parameters and concluded two things. First it appears that inflation expectations are anchored. What this really means is that recent inflation has a small effect on current inflation (Blanchard and Blanchard et al don't attempt to directly measure expectations). Second, the slope of the Phillips curve has declined with large changes in unemployment followed by small changes in inflation. Blanchard stressed that the computer is convinced that the slope declined in the early 90s and that this is not a new great-recession pattern.

I will present some very simple graphs assuming expectations are completely anchored. That is, I will do what old Keynesians are often (incorrectly) accused of doing and ignore fluctuations in expected inflation entirely. The point, as noted by Bunker following Ekaterina V. Peneva and Jeremy B. Rudd, is that the change from the 60s to around now is a reduction of the pass through of labor costs to price inflation. Like Blanchard and BCS, they use a sophisticated time varying parameter model, but the point is simple -- in recent decades wage and price inflation have not moved together.

I think it is worth a blog post to check whether the relationship between unemployment and the increase of nominal labor costs (roughly wage inflation) has changed too. My impression is that it hasn't. I look at two series from FRED

HCOMPBS Business Sector: Compensation Per Hour, Index 2009=100, Quarterly, Seasonally Adjusted

and UNRATE "Civilian Unemployment Rate (UNRATE), Percent, Quarterly, Seasonally Adjusted" with 1950s econometrics, that is scatter plots. awinf is the % rate of increase of HCOMBS over 4 quarters (so the points on the scatter are not independent observations. I pool data from before 1973q1 and after 1985q1, that is back in the good old days and after the Volcker deflation. A 0 next to the dot means data from after 1985q1 and a 1 means data from before 1973q1.

The scatter is scattered. The old and new clouds of points overlap. I think there seems to be a reasonably stable and not shifting long run downward sloping Phillips curve. the main difference between the sub periods is that unemployment has often been very high post 1985.

Here is another scatter using only data from after 1953 so 1953-1972 and then 1985-2015.

For what it's worth, STATA isn't convinced that there has been a statistically significant change since 1973 even though it calculated standard errors ignoring the overlap of the intervals over which labor cost inflation was measured.

Now I look at annual GDP deflator iflation and labor cost inflation (always with overlapping intervals). The scatters look completely different pre 1973 and post 1985

before 1973, the two inflation rates were extremely highly correlated.

After 1985 the (still statistically signficant) correlation was much reduced

It sure seems to me that the change from one period of anchored expectations to another has a lot to do with price setting and not so much to do with wage setting. Given the gigantic changes in the US labor market (roughly the death of trade unions) this is very puzzling.

NAWRU VI Arbitrary Limits on Parameters

by Marco Fioramanti and Robert Waldmann

This is the final post on European Commission decomposition of unemployment into cyclical unemployment and the NAWRU (non accelerating wage inflation rate of unemployment). This calculation is important because cyclical unemployment is used to calculate the output gap and cyclically corrected budget deficits, which are used to calculated allowed spending under the stability and growth pact.

In an earlier post we have noted that the assumption that cyclical unemployment affects the acceleration of inflation rather than the level is problematic. It has become controversial (again) with many macroeconomists convinced that inflation expectations have become anchored so cyclical unemployment is related to the level not the acceleration of inflation (pdf warning).

It seems to us that the effort to extract a time series of cyclical unemployment which is correlated with the acceleration of wage inflation has lead to at least two very strange modelling choices. First, as noted here, the EC assumes that the NAWRU is a twice integrated random walk, that is that the drift of the NAWRU is itself a random walk. This means that the NAWRU sometimes trends up and sometimes trends down. The long term implications of this assumption are nonsensical, and, in fact, the EC doesn't take it seriously. In fact, EC long term forecasts are based on the assumption that the NAWRU is mean reverting.

Second, the EC imposes arbitrary limits on the parameters of their time series model. In particular, and crucially, they impose an upper limit on the variance of disturbances to cyclical unemployment (another pdf warning). This limit has two important effects.

First, it reduces the variance of cyclical unemployment. Second it increases the correlation between the estimated time series of cyclical unemployment and the acceleration of wage inflation. The second point is a bit technical for a blog, but it can be explained (we hope).

The series of cyclical unemployment is estimated in order to fit two observed series: total unemployment (equal to cyclical unemployment + the NAWRU) and the acceleration of wage inflation. Importantly, there are no free parameters in the identity: unemployment = cyclical unemployment + NAWRU. In contrast there are free parameters in the wage acceleration equation -- the slope parameters of the Phillips curve. This means that if, for example, cyclical unemployment is divided by 10, the estimated NAWRU must change and so must disturbances in the NAWRU time series. In contrast, there is no necessary reduction of the fit of the wage acceleration equation -- the Phillips curve slope parameters can be multiplied by 10 giving the exact same forecasts for wage acceleration.

Extreme restrictions on the variance of cyclical unemployment would make cyclical unemployment a negligeable component of total unemployment, while it could still be just as associated with wage acceleration as before. This means that as the allowed variance of cyclical unemployment goes to zero the estimated values of cyclical unemployment will go to those most correlated with wage acceleration.

Importantly this argument has nothing to do with any assumption about the true behavior of wages. Even if the time series of the acceleration of wage inflation were replaced with random numbers, it would be possible to force the computer to chose a time series of cyclical unemployment which is significantly correlated with those random numbers by imposing a low enough variance of the disturbances to cyclical unemployment.

It seems at least possible that the low variance of estimates of cyclical unemployment (and the resulting cyclical rigidity of required austerity) are the by product of an effort to force the data to fit an accelerationist Phillips curve.

NAIRU V Estimation

by Marco Fioramanti and Robert Waldmann

This is the second to last post on the European Commissions DG -Ec-Fin estimates of cyclical unemployment for the purposes of calculating output gaps. This estimate is called unemployment minus the NAWRU (non accelerating wage inflation rate of unemployment). We will call unemployment - NAWRU "cyclical unemployment" even though it is agreed that the NAWRU is partly cyclical.

For several countries (including Italy) it is calculated with a time series model based on an accelerationist Phillips curve in which the change in wage inflation depends on cyclical unemployment. The model is fairly complicated with 11 paramters (estimated for Italy with 50 annual data points and 3 years of atheoretic forecasts). It is briefly described here based on this working paper.

The model attempts to fit 2 time series, unemployment and the change in the rate of increase of wages, and includes 4 disturbance terms. To be very brief, the expected acceleration of wage inflation is a linear function of cyclical unemployment and two lags of cyclical unemployment (the equation includes one of the disturbance terms). Cyclical unemployment is assumed to be an AR(2) (with the second of the disttubance terms) The NAWRU is assumed to be an I(2) second order random walk -- the drift of the NAWRU is itself assumed to be a random walk (so the disturbance to the drift and the disturbance to the level are the 3rd and 4th disturbance terms). The assumption that the drift is a random walk is crazy -- it always implies long term forecasts of unemployment less than zero or over 100%. The EC staff agree that this model can't be taken literally. They ignore it when making long term forecasts. However, the resulting estimates of cyclical unemployment are used to calculated output gaps.

Robert wrote "As one might guess, identification is a bit problematic. However, it is possible to convince a computer to estimate all the parameters." As we (mostly Marco) have attempted to do this for slightly modified models, we have discovered that it is very difficult to convince a computer to estimate all the parameters (DG -Ec Fin uses their own software). This (in addition to the usual procrastination) has caused a long delay between NAWRU IV and NAWRU V (this post).

The problem (at least for STATA addicts) is that STATA ends up at a corner attempting to set the variance of the disturbance to the drift of the NAWRU to zero. This means that estimated of the model as officially described using STATA's standard sspace command provides no empirical support for the theoretically unjustified assumption which has impossible long term implications. STATA (v. 11 to 14) refuses to report estimates after getting stuck in a corner (this is a feature not a bug).

Based on Robert's efforts to code a pseudo-annealing Kalman filter maximum likelihood estimator (which are not publishable even in a blog) we think the key issue is the imposition of an arbitrary maximum on the variance of the disturbance to cyclical unemployment. This will be the topic of NAWRU VI -- the final episode if and when the conclusion is based on the use of standard software.

But in this post, we want to discuss estimation of the model with the variance of that disturbance term set to zero -- that is -- estimation of a model in which the NAWRU is assumed to be a random walk with drift.

This model has less appalling implications for the long term. The NAWRU is not restricted to the range from 0% to 100% but it would be easy to impose this restriction (the standard approach would be to assume that the NAWRU is a martingale and the variance becomes small when the NAWRU is near the limits -- it is possible to assume that this state dependent variance is constant over the range experienced during the sample period so the model as written is valid). The fluctuations in the NAWRU remain exogenous and unexplained, but there is at least a literature on why the natural rate of unemployment might fluctuate.

This model has implications strikingly different from those of the EC DG- EcF Fin model. The The fitted NAWRU no longer tracks the business cycle. The variance of cyclical unemployment is much greater. The resulting fiscal dictates would have been very different if the EC had used our simpler model .

here un = NAWRU

ug = unemployment - NAWRU = "Cyclical Unemployment"

ddw = the acceleration of wage inflation

The estimate command is

(the constraints are identities such as unemployment = (unemployment-NAWRU) + NAWRU and the assumption that the NAWRU is not mean reverting)

matrix rjw=(1, 1, 1, 1, 1, 1.407003, -0.49923037, 0.1555339, 1, 1, -0.031958257, 0.048677339, -0.019232409, 0.032105009, 0.28977462, 0.000507234)

sspace (un L.un L.mu, state noconstant) ///

(mu L.mu, state noerror noconstant) ///

(ug1 L.ug, state noerror noconstant) ///

(ug2 L.ug1, state noerror noconstant) ///

(ug L.ug L.ug1, state) ///

(u un ug, noerror noconstant) ///

(ddw ug ug1 ug2, noconstant) if year >=1965 & year<=2017, ///

iterate(100) from(rjw) constraints(1 2 3 4 5 6 7) ///

covstate(di) covobserved(di) difficult

Here are the estimates

For what it's worth, the likelihood is larger than that reported by the EC. We don't think too much attention should be paid to those two numbers -- the reported likelihood depends on technical assumptions used to initialized the Kalman filter when there are nonstationary variables. The null that the disturbance to the NAWRU has mean zero (so the NAWRU is a trend) is not rejected. There is little evidence that ug is related to the acceleration of wage inflation.

NAWRU IV The Long Term

Guest post by Marco Fioramanti explaining how the EC "reconciles" the NAWRU Phillips curve model with completely implausible long term implications with their long term forecasts. Brief summary -- they don't take the model seriously.

by Marco Fioramanti

At this link you can find an EC's WP in which they distinguish between NAWRU and Structural Unemployment.

  They say (pg 1 link above):

“(...) Importantly, this method [the Unobserved Component Model for NAWRU - mf] provides only a proxy for structural unemployment that might not remove fully the impact of all temporary shocks. In particular, persistent shocks are likely to contaminate the trend.”

  Macroeconomic projections for the forecast and the fiscal stuff in EC works this way:

  1. Country desks do the forecast up to t+1/t+2 depending on the season (t+1 in spring, t+2 in autumn).

2. The service in charge of the estimation of potential output and output gap takes the numbers from (1) applies the methodology (production function approach called PF below) and go to t+5. In doing this a set of rules (on top of the PF approach) is used to extend the projection horizon, one of which is that the output gap closes in t+5. These estimations are at the core of the SGP.

3. EC also has long term projections for long term sustainability of public finance (pension, health care etcAgeing-related expenditure) which goes from t+10 to t+50. This is a simplified PF approach. To link t+5 to t+10 they have introduced a modified version of PF(t+5) methodology in which they anchor NAWRU to converge to structural unemployment in t+10 (for Italy structural unemployment is 9.4% according to EC’s latest estimate).

They say (pg. 39 in this WP ):

            “The NAWRU framework incorporates economic rationale into the T+10 NAWRU forecast, relying on a set of four labour market economic indicators (i.e. unemployment benefit replacement ratio; tax wedge; active labour market policies; & union density) and a set of macro control variables (i.e. TFP; real interest rate; employment in construction; & the T+5 NAWRU) to guide the forecast beyond T+5. This approach allows for a decomposition of the NAWRU into structural drivers and medium term cycles & for a prediction between T+6 and T+10 which reverts the NAWRU back towards the long run structural unemployment rate. A simple convergence rule towards the T+10 NAWRU is applied & a so-called prudent rule is built into the approach in order to override the calculations in cases where the T+10 NAWRU forecast is deemed to be surrounded by a relatively high degree of uncertainty for a particular country.”

So, while EC recognizes the NAWRU is too cyclical, they keep using it.

Fioramanti, Padrini and Pollastri (2015) propose (among others methodologies) using structural unemployment instead of NAWRU in the PF approach also for the t+5 projections - so the estimate of the natural rate of unemployment used in calculating the output gap would be the natural rate of unemployment as originally defined by Friedman. Endnote: In contrast to the t+5 methodology (for which you can get all the necessary files and instructions to replicate EC’s results) the t+10 methodology is not fully public.

 -- Marco Fioramanti

Comment by Robert Waldmann

It is very important that the EC doesn't take the I(2) NAWRU model seriously.  They have a model used for long term forecasts and another model used to calculate the NAWRU and cyclical unemployment = unemployment - NAWRU.  The NAWRU is used only to calculate the output gap and allowed deficits under the stability and growth pact (SGP). The bad long term implications of policies with good effects in the short term is the justification for the SGP *and* the claim that the concept of the natural rate of unemployment has policy relevance.

The estimates of cyclical unemployment include a series of arbitrary fudge factors NAWRU minus structural unemployment called "medium term cycles". There is no explanation of the cause of "medium term cycles".  The model of "medium term cycles" is not a model of "cycles" as the word is used in macroeconomics, because NAWRU-structural unemployment is not stationary.

It is hard to justify the use of a model (the NAWRU accelerationist Phillips curve discussed in these posts) with absurd long term implications which are ignored when making long term forecasts in the application of the SGP. I think there are two possible explanations of this modelling strategy. First it is possible that the technicians were instructed to make the accelerationist Phillips curve work and overcome all challenges from the data. Second it is possible that DG EcFin is willing to allow deficts over 3% of GDP because of cyclical corrections but only so long as the cyclical corrections are small. This corresponds to dividing the cycle into a "medium term cycle" with huge variance which has no role in a short term cycle with small variance (based on which Treasuries are given some slack) .

In any case, I certainly agree with Fioramanti, Padrini and Pollastri's proposal to use unemployment minus structural unemployment when estimating output gaps.

Global Warming Update

To celebrate the Paris peace talks and in honor of the Christmas season it has been almost unpleasantly hot in the Washington DC area (interesting how the people who laugh at Al Gore whenever it snows aren't mentioning this).

I am in my parents house in Silver Spring Maryland. On Christmas day it was so hot in their house that we used a fan to cool. We didn't turn on the air conditioning in December only because we didn't want to contribute to the global problem.

Here is a photograph taken (by Richard Waldmann) December 27th 2015 of Forsythia's blooming in Silver Spring Maryland

NAWRU III Hysteresis

This is the third of a series of posts on the non accelerating wage inflation rate of unemployment (NAWRU) estimated by the European Commission. In the first, I argue that this estimate is very important because it is used to implement the Stability and Growth Pact. In the second, I argue that the NAWRU is not well defined if there are anchored expectations or if there is downward nominal rigidity, and that there is strong evidence of both in 21st century Italian data (and therefore no hint at all that the NAWRU is a concept useful for those attempting to estimate the current Italian output gap). This post was a general overview and promise of future blogging.

When estimating the NAWRU the European Commission staff imposes the assumption that it shifts exogenously. The assumption is that the NAWRU is I(2) that is that the first difference of the first difference of the NAWRU is stationary. This implies that the NAWRU will almost certainly *not* remain in the interval from 0% to 100%. This makes no sense, but, in this post I will focus on the assumption that the disturbance terms which shift the level and the trend of the NAWRU are independent of all other variables. This means that the NAWRU is assumed to be genuinely exogenous -- not just exogenous to the model but exogenous to the economy, and, in particular, not affected by monetary or aggregate fiscal policy. This means that when unemployment is decomposed by total unemployment = NAWRU + cyclical unemployment, the conditional distrubtion of the NAWRU depends on past NAWRU but is independent of current and past cyclical unemployment.

The assumption that these shifts are exogenous is extremely important. An alternative view (discussed in 1960 in the second major article on the Phillips curve) is that structural unemployment is not exogenous because, with time, cyclical unemployment can become structural. This possibility was discussed and named "hysteresis" by Blanchard and Summers in 1986. They and Eugenio Cerutti have returned to the topic and presented massive evidence that it is important in (pdf warning) 2015.

The assumption that the NAWRU is not affected by aggregate demand is not easily reconciled with the fact that, in the 21st century, the estimate NAWRU closely tracks total unemployment. This must be true of estimated NAWRUs as inflation has remained stable in Eurozone countries (warning same pdf to which I linked in an earlier post).

The hypothesis that the NAWRU is exogenous can be tested by embedding the model used by the Commission in a more flexible model. One possibility (actually explored by the commissions DG EcFin) is to allow the acceleration of wage inflation to depend on lagged shifts in total unemployment. I have estimated both the official model and this more flexible model by maximum likelihood. My impression (that is the output of a program I wrote but don't swear by) is that the null of the official model is strongly rejected against the alternative. In any case, Blanchard, Cerutti and Summers present strong evidence that recessions often appear to have long lasting effects. The general pattern of European unemployment and wage inflation from 1980 on is of huge long lasting shifts in unemployment and a single huge decline in wage inflation in the 80s.

The assumption that the NAWRU is exogenous and must simply be accepted by fiscal authorities is critically important. If austerity causes an increase in the NAWRU, it can be self defeating. There is now overwhelming evidence that, especially when the safe short term interest rate is near zero, reduced government spending causes lower GDP and higher unemployment (pdf warning). If cyclical unemployment becomes structural, this implies a long lasting reduction in revenues and a long lasting increase in social insurance transfers. As noted by DeLong and Summers (pdf warning), this can imply that reduced government spending causes a higher long run debt to GDP ratio. The technical assumption that the NAWRU is exogenous has fundamentally important policy implications. It can be tested.

The econometricians at the Commissions DG EcFin are placed in a difficult position. They are required to look at data to apply the stability and growth pact, but they are not allowed to estimate parameters which suggest that the stability and growth pact causes instability and stagnation.