Two quick responses on choosing depression

  • Scott Sumner and Marcus Nunes suggest that our policy failures are in some sense just an “oops!”, that they result from a mix of mistaken theory, institutional frictions, personal quirks, and political forces rather than being, as I argue, a choice. I’d be more sympathetic if these “mistakes” were unique to the United States. Broadly similar choices have been made in Europe, and Japan.

    You can tell idiosyncratic stories of political and institutional failure for each of these countries individually. But ex ante, you’d not have expected similar policy responses. From an international balance perspective, for example, it’s not surprising that Japan did not inflate, but you might expect the United States to jump at a policy response that would reduce the burden of its considerable debt to foreigners. Yet the US and Japan seem to be on broadly parallel tracks.

    There is supposed to be a constituency for stimulative policy. The conventional story is that, during a downturn, election-seeking politicians will be recklessly pro-expansion, in conflict with and checked by an independent central bank. But, at least in the United States and Europe, there is surprisingly little appetite among politicians from “mainstream” parties to emphasize either fiscal or monetary expansion. On the contrary, the political conversation revolves around restraining deficits and “being responsible”, which is code for ensuring that the demands of creditors (public and private) are fully satisfied. This may change. In Greece, Portugal, Ireland, and Spain, parties now viewed as “fringe” may gain influence. But despite a years-long downturn of Great Depression severity, so far elected politicians in all these countries have emphasized a narrative of necessary adjustment and responsibility, and have almost never agitated for monetary policy better tailored to Southern Europe or threatened disorderly default. The behavior of politicians, in Europe as in the United States, suggests that the people to which they are accountable are not primarily the fraction of their labor force that is out of work. This is different from the 1970s, when elected officials did seem to behave as though they were accountable to unemployed people, and put central bankers under intense pressure to be accommodative. Something has changed. In status quo democracies, politicians tend to respond to groups that are numerous, rich, or organized. Since the 1970s, in all the depression democracies, retirees and near-retirees have grown both more numerous (as a fraction of voters) and more rich, while workers have grown less organized. Emerging markets like China have responded to the downturn quite differently. I think this pattern is too systematic to chalk up to idiosyncratic mistakes. [1]

  • Kevin Drum writes:

    [The problem is] Steve’s claim that the median influencer — whoever it is — “is panicked by the prospect of becoming poorer,” which explains our financial system’s rabid opposition to inflation higher than 2%. This claim might have made sense 50 years ago, when many of the affluent elderly were coupon clippers. But today it doesn’t make sense even for them, and it certainly doesn’t make sense for anyone else. Hardly anybody literally lives on a fixed income these days. The elderly middle class lives on Social Security, which is indexed to inflation. The broad middle class has its retirement savings invested in 401(k) funds, which do better when the economy does better. The wealthy have their money invested in a variety of sophisticated vehicles, all of which are hedged against inflation in one way or another. We simply don’t live in a world of fixed returns anymore. Unless you’re a hedge fund quant making some specific kind of inflation play, there are very few people today who have any reason to fear higher inflation, especially of the moderate, temporary sort that the Paul Krugmans and Scott Sumners of the world advocate.

    Drum is right that there are no more coupon clippers. There is very little coupon to clip, because interest rates have been in secular decline for the last 30 years. But he is wrong to jump from that to imagine that upper-middle-class retirees and near retirees are immune to inflation. Affluent retirees depend heavily on asset wealth; Social Security cannot cover the lifestyles to which they’ve grown accustomed, and the expenses and commitments they’ve accumulated.

    Affluent older Americans hold a large proportion of their wealth in bonds and cash-like instruments (bank CDs, money market accounts). They also maintain significant positions in stock funds that might “do better when the economy does better”. But, unsurprisingly, retirees keep the wealth they most depend upon in safer, fixed income vehicles. The proportion they keep in stock funds tends to increase with wealth. [2] Since they can’t clip coupons, retirees rely upon asset sales and redemptions for income. They try to manage the pace of sales so they don’t outlive their capacity to maintain their lifestyles.

    Retirees living on asset wealth are very exposed to inflation. It’s an error, a fallacy of composition, to assume that the existence of hedges and “sophisticated vehicles” means that somehow everybody can be protected. Every debt contract imposes inflation risk that some party must bear. Stock markets get the press, but most financial claims on capital are structured as debt, all of which must be held, directly or indirectly, by some human (usually an old or rich human). [3] Any individual retiree can shed inflation risk by switching from, say, municipal bonds or bank CDs into TIPS. But retirees and near-retirees in aggregate can’t do this: there aren’t enough TIPS to go ’round, and somebody has to be persuaded to hold the unprotected bonds. TIPS already pay negative yields. If creditors grow nervous and try to herd into protected assets, TIPS yields would be driven even more sharply negative and prices of ordinary bonds would collapse. Somebody, some creditor, will bear the loss of value imposed on bondholders by inflation. It’s a game of musical chairs. No matter how sophisticated your vehicle, evading inflation risk is and must be costly if markets are remotely efficient. (If markets are not efficient and it is cheap to slough off inflation risk, then someone — quite possibly a gullible retiree — has been made a patsy and persuaded to offer underpriced insurance. “Sophisticated vehicles” tend to benefit those who structure them more reliably than those who purchase them.) [4]

    Affluent retirees do hold some of their wealth in corporate stock, and it is obviously true that the US political system and the Federal Reserve are extremely loss-averse when it comes to the stock market. Note that some equity claims (think banks) are indirect claims on debt, and so are themselves conduits for inflation risk. And there is no necessary relationship between asset inflation and goods inflation. The interests of affluent retirees are best served when financial assets in general (both stocks and bonds) are inflating but goods prices are not. And for the most part, that is what the US political system works to deliver. [5] If you could promise that stimulating the economy would lead to a stock boom, much of the opposition to expansionary macro policy would dissolve. But you can’t promise that. Even if the policy “works” from an employment perspective, stocks may fall. Corporate profits are near all-time highs as a fraction of GDP, and stock markets are priced with optimistic growth assumptions already. Sharing more of the wealth with wage earners may cost more than the benefit to shareholders of incremental sales. Today’s affluent retirees lived through the most stock-market-focused era in human history. They remember the 1970s stagflation, during which the influx of women into the labor force was successfully absorbed but stocks languished. They know that stock wealth is fickle.

    So people who intend to live off their nest eggs rely first and foremost on the “safety” of bonds. Expansionary policy is a hazard for them.

    Consider NGDP targeting. Under this policy rule, Treasury securities would become risk assets, whose real return would be geared to the health of the economy. (NGDP path targeting implies that shortfalls in real growth must be matched by increases in inflation.) Treasuries become low-beta index funds, diversified claims on the real production. Nominal yields would be more stable, but the real value of a future payment becomes as uncertain and volatile as the business cycle.

    More conventionally, an increase of the de facto inflation target from 2% to 4% would be a “tax” on whoever holds fixed income securities at the moment the change is announced. Holders of long-term bonds would lose no matter what. If the inflation target is raised in order to enable steeper negative real yields (and that is the point), then people holding short-term bills and deposits would also face a new 2% per year cost, for as long as the low rates persist. And that’s not the worst of it. Ben Bernanke is speaking in the voice of older affluent Americans when he argues that adjusting the inflation target is bad because it might disturb “anchored” expectations. What people who rely upon asset wealth really fear is a sharp, unexpected increase in inflation. And much as that may not be what dovish economists have in mind, there is no guarantee that higher inflation and lower real rates will succeed at reviving growth and employment. If the new target fails, will the Fed double down and try 6% inflation? Even if the Fed says it won’t, will nervous markets require the bank to prove its credibility at 4%? Will the Fed be willing to hike interest rates into a still depressed economy, to prove it will hold its new 4% inflation target? Should it? All bets are off.

    Affluent retirees and near-retirees have very good reason to fear inflation.


Notes

[1] In Japan, Germany, and France, more than 50% of the total population is over 40 years old. (56.5%, 57.2%, and 50.2% respectively.) They do have children in these countries, so there are many more retirees and working-age people over 40 than there are younger workers. In the US, “only” 45.5% of the population is over 40, but I think as a polity, the United States behaves as though it is substantially older, because its unusual fecundity (for a developed economy) comes from relatively poor and disenfranchised immigrants. By comparison, China’s over-40 share is 40.3%, Brazil’s is 32.8%, and India’s is 27.1%. In the 1970s, when the US policy was, um, plainly inflationary, the over-40 share of the population was 36.1%.

Using 40-years-old as a cut-off age is arbitrary. “Retirees and near-retirees” is a vague formulation, and 40+ is admittedly a stretch. But people do not turn suddenly into zombie-like asset hoarders. As cohorts of workers age, they accumulate financial assets and become less likely to face unemployment. When they retire, their fear of unemployment disappears entirely, and their dependence upon saved assets increases. There is a continuum between the young and poor, who should prefer the risk of stimulus, and the old and rich who should not. It’d probably be best to modify my story to declare “affluent retirees and older workers” the “median influencer”.

By the way, I am guilty of data mining the cutoff age to support my case. (I examined the population pyramids.) Add whatever grain of salt you like, but I think the point stands. The data are via Wolfram Alpha, e.g. “age distribution US 1975“, then “Show Details”.

[2] As of 2001, people over 65 with assets of $1M or less held substantially more in cash and bonds than stock. Richer people held a greater share in stock. See Curcuru et al, Table 6.

[3] Remember Karl Smith’s point that capital is mostly stuff like buildings and cars. In the US, the bond market is roughly twice as large as the public equity market, and that excludes debt held indirectly via ordinary bank deposits.

[4] Throughout this piece, I’m using “inflation risk” to encompass both the risk that inflation will diminish the real value of precontracted payments from long-term, fixed coupon securities and the risk that inflation will enable sharply negative real yields, affecting the real value of floating rate debt and short-term claims.

[5] This lends credence to Matt Yglesias’ view that central banks would use negative nominal rates where they do not use inflation to generate negative real yields. Negative nominal yields would deliver windfall gains to people holding stock and longer-term bonds, while negative yields engineered via inflation would have uncertain effects on stock and reduce the real value of longer term bonds (with or without capital losses, depending on whether yields follow inflation). If the American political system is geared to paying off asset holders, it’s no wonder that reducing nominal yields became “conventional” monetary stimulus.

 
 

47 Responses to “Two quick responses on choosing depression”

  1. JKH writes:

    SRW,

    What Congress, Treasury, and the Fed might have considered in a counterfactual world of intelligent co-ordination is aggressive borrowing with long dated Treasuries at current low rates, cutting taxes aggressively with the proceeds to boost aggregate demand, and PLANNING on following that up with a cycle of conventional monetary tightening in economic growth mode. That strategy would have provided effective fiscal stimulus, locked in borrowing costs at low rates, supplied long duration hedges to insurance markets that want it now, and pumped up expectations for higher rates and correspondingly higher fixed interest income down the road. So they should have borrowed a pile of long dated Treasury funds and dumped it all into tax cuts. Pump up the deficit short term and tide a fixed borrowing cost over well into the next generation. The Fed apparently lacks the guts to take a risk on short term inflation, even though they have the conventional tools to stop it. This is a bit puzzling, given their insistence (and they are right in this) that they have the tools to “exit” from the excess reserve position and raise short rates when necessary. They shouldn’t be advertising that capability as a response to market place fears. They should be trumpeting it as a proactive strategy and something the market should be looking forward to. Long dated bond twisting and asset swapping may be exactly the wrong thing to do from a systemic interest rate risk management perspective. They should just borrow long, cut taxes, and follow it up with a normal cycle of monetary tightening. And there’s no need to sacrifice inflation management longer term when the arsenal is already available to stop it when necessary. They don’t need a commitment to act irresponsibly, as Krugman puts it. They need a commitment to take a risk, run with it as strategy, manage it, and then conclude it in the normal way.

    This is obviously not an MMT solution, given the bond strategy proposal and it’s pre-occupation with interest costs. I also depart from the Market Monetarists in two important respects – their belief that QE (or “base” management) is a sufficient stimulus transmission mechanism (because they do think it’s sufficient), and that NGDP targeting is necessary as an enabler of inflation management flexibility. That’s a big departure. The idea of NGDP targeting is gimmicky. It’s an unthinking rule that is supposed to give us comfort under the assumption that policy makers aren’t bright enough to think through the circumstances that require discretionary inflation targeting flexibility. I don’t want policy makers working to a rule that assumes they’re their dumb. But that’s typical of the rigid monetarist formula approach to money management of any sort.

    The required tools are already available. The solution does take imagination, will, and institutional co-ordination. And, unfortunately, it requires strong technocratic leadership – not political or analytical compromise between existing silos of economic ideology or political institutions. That’s where I disagree with your previous post. This is definitely a technical co-ordination problem. Fiscal/monetary co-ordination is a technical problem, before it can become a political problem and a compromise candidate.

  2. Mike Sax writes:

    Very intersting theories Steve! I find your overall premise very thought provoking. I like the idea of a “median influencer.” What I really like about this theory is it doesn’t let “the people” wholly off the hook for miserable policies.

    Your last post inspired one of my own. http://diaryofarepublicanhater.blogspot.com/2012/04/americans-have-chosen-depression.html

    It reminds me of what Mike Kingsley said after Bush beat Dukakis in 1988: “Democracy can goof.” In reality it’s naive to think that “The People” all share the same interests.

    In this sense you see that Paul Ryan’s original proposal in 2011 was shrewd im the sense that he exempted anyone over 55 from his “bold” plan to privatize Medicare. Esssentially the old baby boomer generation-all those who most benefitted from the New Deal-were complicit in allowing the GOP to take it from everyone else as long as it was preserved for them.

    This has been the real story of the Tea Party, the elderly who had for years been reliable Democratic voters have gone to the GOP in exchange for protecting their interests at the expense of their children and grandchildren.

    We see here how wrongheaded is the claim that the GOP deficit hawks are about remembering the next generation and being responsbile to them.

  3. Mike Sax writes:

    JKH you said “I don’t want policy makers working to a rule that assumes they’re their dumb. But that’s typical of the rigid monetarist formula approach to money management of any sort.”

    The reason for this is that monetarism has always believed going back to Friedman that forcing monetary policy to follow a rule is somehow more nearly like a real free market. Essentially the reason for it is libertarian ideology that underlikes monetarism. Sumner himself often speaks of NGDP futures or having a computer determine monetary policy.

    Bernanke however in a book he wrote 20 years regarding inflation targeting argued that all monetary policy is discretionary that the hope for a rule based policy is an illusion.

  4. foosion writes:

    I’ve long argued that for businesses and their owners and managers reduced unemployment essentially means the certainty of higher labor costs and the possibility of higher sales (possibly leading to higher profits). Therefore, we don’t see pro-growth policies.

    A policy which increases their taxes in order to pay for someone’s improved retirement security is disfavored on at least two grounds – less cash today through higher taxes and higher labor costs due to increased bargaining power by employees. Therefore we see continued attacks on the safety net.

    Politicians appear to be responsive to the needs of a group other than the median citizen and the median voter. Remember that the median voter is not an expert at economic analysis.

  5. Max writes:

    You are overthinking this. The simple explanation is policy inertia. The major central banks have been “fighting inflation” since 1982. They aren’t embarrassed by undershooting their inflation target (only inflation < 0% would be considered policy failure).

  6. Agog writes:

    It’s also relevant to note that a lot of money is spent on influencing the debate in ways designed limit the scope for expansionary policy. I guess the Peter G. Peterson Foundation is the most flagrant example.

  7. PC GAMES writes:

    PC GAMES…

    [...]interfluidity » Two quick responses on choosing depression[...]…

  8. Bryan Willman writes:

    One other choice bit. The “unemployed” (and “underemployed”) section of the population is at worst about 15% right now (U6) for the US as a whole. (The rate for, say, 16-28 yo black males is a different and troubling matter, but no directly important here.) The headline number that probably (incorrectly) drivers a lot of political reaction is less than 9%.

    And that’s a fraction *of people who say they want jobs*.

    So on a simple numbers basis, the people who want the world to be stable (or Very Stable) outnumber those would like a positive shake up by on the order of 6 to 1.

    Now of course, the total real value of transfer payments and consumption fueled by asset sales cannot exceed the real output of the working economy (much less than that actually) no matter what. But *you* can go first on giving up the value of *your* retirement investments.

    But in a very real way, you are right – the majority has great vesting in some version of the status quo, and will cling to it even as it crumbles.

  9. Peter K. writes:

    Your blog is the first place I came across the idea that Japan, the U.S. and Europe are aligning with slow growth and low inflation. This is a real insight in my opinion.

    “Retirees living on asset wealth are very exposed to inflation. It’s an error, a fallacy of composition, to assume that the existence of hedges and “sophisticated vehicles” means that somehow everybody can be protected.”

    Yes I believe this meme is wrong. It’s usually argued by those who also incorrectly assert that inflation is a regressive tax on wages while the rich and banksters are hedged. Not true. It brings to mind how during the housing bubble people confidently argued that risk was effectively hedged against with complex financial instruments that mere mortals can’t comprehend. Turned out not to be the case.

    “Ben Bernanke is speaking in the voice of older affluent Americans when he argues that adjusting the inflation target is bad because it might disturb “anchored” expectations.”

    But I also remember him arguing against this during Congressional testimony. He was asked about “financial repression” and Fed policies to bolster the economy. He specifically said that their are wider concerns than just the returns investors get on their money. Bernanke seems to know the issues but isn’t doing much about it except acting when needed to avoid a deflationary trap.

  10. Becky Hargrove writes:

    The obvious question is “why now?” In the seventies and the eighties, we got stimulation fairly quickly, and it was not hard for a boomer to go and find a job when the storm had blown over. Ouch, perhaps that was precisely the point although I will point out that there are plenty of us fifty somethings in the same position today that younger people are…often the selection process beats us down so that we don’t live long enough or have the energy left to tell the tale. But those of us who didn’t ‘succeed’ see how the forty-somethings are right – lots of people are vested in making sure this isn’t a fire sale for the boomers.

    Which would be fine, were it not for what all the physical capital and real assets make possible in more normal times: the continuation of valuable knowledge skills and services that are vital for any economy to function. While I don’t get the technical points this is where I think more in monetarist terms: in a monetary economy we rely on real capital, goods, commodities and actual products to make human capital use possible in the first place. Since these are all currently defined by money it has to be that way. I know that there is no realistic place for any designation for human capital presently in monetary terms which is why I work to redefine human capital in time use terms. Otherwise we face the danger other nations face and have faced in the past: the sacrifice of human capital to maintain the status quo.

  11. Peter K. writes:

    At 8 I wrote:

    ““Ben Bernanke is speaking in the voice of older affluent Americans when he argues that adjusting the inflation target is bad because it might disturb “anchored” expectations.”

    But I also remember him arguing against this during Congressional testimony. He was asked about “financial repression” and Fed policies to bolster the economy. He specifically said that their are wider concerns than just the returns investors get on their money. Bernanke seems to know the issues but isn’t doing much about it except acting when needed to avoid a deflationary trap.”

    Ugh this wasn’t quite right. Bernanke was arguing against those retirees demanding high returns, not against adjusting the inflation target.

  12. jsn writes:

    “The conventional story is that, during a downturn, election-seeking politicians will be recklessly pro-expansion, in conflict with and checked by an independent central bank.”

    I find it wonderfully ironic that in an political economy in which all the dominant economic models ignore or omit money and banking, we none the less expect the central bank to manage the economy. The level of cognitive dissonance here by orthodox economists is monumental.

    That said, the conventional narrative you paraphrase, when it was true and became the convention, delivered thirty years of epic growth that created and entrenched what middle class remains today. It turns out all that “recklessness” wasn’t reckless at all, but massively socially beneficial.

    But the right turn in 1980 changed the makeup of your “median influencer” by altering the structure information flows about economic issues. On the one hand SCOTUS had just decided that money was speech and on the other the FCC decided propaganda was OK. These result of these events combined to begin the process of codifying in law what is now a very elaborate and highly regulated political marketplace where distribution of political ideas goes to the highest bidder. As one would expect this results in the spread of political ideas that entrench the interests of concentrated wealth.

  13. [...] the whole thing.  In American politics, old people usually get their way.  In Western Europe, those governments [...]

  14. Ashwin writes:

    great post. On the point that “The interests of affluent retirees are best served when financial assets in general (both stocks and bonds) are inflating but goods prices are not”, I wrote a post a while ago where I also looked at the numbers on asset holdings of the 1%, 99% etc here http://www.macroresilience.com/2011/06/13/the-influence-of-special-interests-and-rentiers-on-monetary-and-fiscal-policy/ , the exec summary of which is below:
    a significant proportion of the balance sheet of wealthy Americans is made up of real assets – real estate, stock and business holdings. What wealthy Americans, businesses and banks share is a common interest in supporting asset prices (real and nominal), a lack of interest in seeking full employment unless it is a prerequisite for supporting asset prices, and an aversion to any policies that can trigger wage inflation. The goal of asset price inflation without wage inflation is best achieved by an exclusive reliance on monetary policy. Even within the ambit of fiscal policy, supply-side incentives for businesses are preferred.

  15. TC writes:

    “You are overthinking this. The simple explanation is policy inertia. The major central banks have been “fighting inflation” since 1982. They aren’t embarrassed by undershooting their inflation target (only inflation < 0% would be considered policy failure)."

    I don't agree at all with this, because it misses the forest for the trees. The Michael Woodford "stable prices should be the only goal" implicitly favors stable prices and high asset prices over economic growth. Michael Woodford would be against 15% real growth if it required 30% inflation to achieve it.

    The "strategy" for lower inflation isn't a strategy at all, it's a tactic. It's a tactic to support the broader goals of helping creditors over debtors, to support asset prices of those same creditors over real economic growth, and to protect the real value of money over economic growth.

    Nice post Steve. Any objective reading what's happened over the last 30 years shows the primacy of keeping creditors whole.

    JHK,

    " They need a commitment to take a risk, run with it as strategy, manage it, and then conclude it in the normal way."

    Brilliant.

    I do think "President Obama issuing a Trillion Dollar coin and committing to an NGDP per capital level target" is better than nothing. The expectations change with this announcement would be huge, and perhaps enough to even make things better.

    On the other hand, you're 100% correct. We have technical plumbing problems to solve even if we do have the tools in place, and solving these problems of plumbing would make the political will to fix our problems much more likely to exist.

    I also tend to think the NGDP level target makes fearful people less fearful. I don't like it myself that much, but Scott S is terrified we're going to Zimbabwefy ourselves. It's a real fear for some people. So if they need an NGDP level to feel safe at night, well, there you go.

    It's also a way to make the Fed less anti-democratic. We can better tell if the fed is doing its job. Feel free to blast away on this – I am just pointing out it's not entirely dumb for people less acquainted with the entire NGDP debate.

    "even though they have the conventional tools to stop it. …They should be trumpeting it as a proactive strategy and something the market should be looking forward to. "

    That's right – all the QE, low rates and the rest are both ways to stimulate the economy AND giving massive amounts of weaponry to fight any future inflation.

    Ashwin, I've always loved that post of yours.

    I think it speaks to the huge problem with monetary policy – that it's just a wealth effect spillover. Of course the rentier class loves Monetary Policy – it makes them wealthy relative to the rabble while giving them full control over the economy.

    I pointed out the end game for monetary policy happens when there is no more real estate bubble. The real estate wealth effect is the primary channel by which monetary policy impacts the economy.

    So when real estate falls into disfavor, monetary policy becomes impotent. This is what makes me sick about further calls for stimulating the economy through MP. We can give already rich people more money, but what does this do for our economy? In some ways, MP is trickle down economics, disguised as a way to have the least impact on the economy.

  16. Alex Godofsky writes:

    The public choice explanation has veneer of plausibility that I just don’t think holds up under scrutiny.

    The output gap is currently over a trillion dollars. Every single year more than a trillion dollars in wealth that we could produce is not produced. We have a bunch of claims on future production, some of them shaped in ways that would capture that additional wealth and some of them that might actually be reduced by that additional wealth production. Fine. But given the size of the gap, I don’t see how such an enormous proportion of those claims could actually be hurt by closing it. The free lunch to be eaten is just too large; almost everyone should end up getting some of it. There can’t be a lot of people who both own a large proportion of the claims on future production and would be hurt on net by a large increase in that production.

  17. beowulf writes:

    “Somebody, some creditor, will bear the loss of value imposed on bondholders by inflation. It’s a game of musical chairs. No matter how sophisticated your vehicle, evading inflation risk is and must be costly if markets are remotely efficient. (If markets are not efficient and it is cheap to slough off inflation risk, then someone — quite possibly a gullible retiree — has been made a patsy and persuaded to offer underpriced insurance…)”

    I have just the patsy. Imagine a rube so gullible yet so rich, if a town gets wiped out by a tornado, he’ll take it upon himself write a check to every homeowner! If a child is too poor to pay for a doctor visit, he’ll cover it. Its probably a myth but from what I hear, years ago some con men from Germany talked him into funding a scientific project to “send a man to the moon” (Ha, what kind of ROI did they promise? Did they bring him back green cheese? Sucker!).

    Find that guy, Sam something, and I think your problems are solved. He could offer life annuities to retirees, promising to absorb any inflation risk himself; he could even offer to buy securities (or real estate) today at retroactive prices from yesterday. Not only does he spend like a drunken sailor on pay day, he’s actually the guy paying the sailor! Anyway, there’s your mark, Waldman, don’t let him get away.

  18. Dan Kervick writes:

    Steve, I think you are imputing a greater degree of informed choice to the public than actually exists.

    There are a relatively small percentage of people who know what’s going on. They have personal interests that do not closely align with the broader public interest, and most of the politicians now work for them.

    The people on the street belief that we can only spend extra money that we already happen to have lying around. The leadership of both parties told them that we are “out of money”. The President appointed a bipartisan Out of Money Commission to underline this point. Both parties spent last year arguing about the best way to adapt to our new and abstemious out-of-money world. How many people are in a position to second-guess that kind of bi-partisan unanimity?

    On a side point, could I point out that economists use the word “inflate” in a bizarrely polysemous and almost willfully confusing way? Sometimes it means “increase in the money supply.” Sometimes in means “increase in the price level.” Sometimes it means “increase in the rate of economic growth.” Among certain schools of economists these phenomena are all yoked together. Neverheless, it is confusing usage. Of course, inflate also is connected in the public mind with “blowing up”, as in bubbles.

    You are never, in any political environment, going to win political support for a policy doctrine summed up by “We need to inflate.”

  19. Mike Sax writes:

    “You are never, in any political environment, going to win political support for a policy doctrine summed up by “We need to inflate.”

    Well Dan I would vote for the guy who said that though maybe I’m the only one who would. I do find Steve’s take different and intersting. You just want to reaffirm the usual script-the evil banks vs the sainted-but ignorant- people.

    His point is it’s not just the top 1% but some of the upper middle class who are also complicit-it is their voting power that gave us the tea party.

    I mean let’s be honest. Is there anything more disappointing than the attitude of our senior citizens in recent years?

    The biggest laugh and a half is this idea that the Tea Party is responsible and cares about “our children.” The reality is that this generation of retiring baby boomers who have been the ones who have truly reapt the benefits of New Deal government-SS, Medicare, the original GI Bill, etc-are now willing to sell out their children and grandchildren.

    And that’s why Ryan was shrewd when he marketed his plan by promising only to privatize those under 55. He was giving older Americans what they want-their benefits will be left alone in exhange for selling out their children and grandchildren-the kids can fend for themselves.

    I find Steve’s take a little refreshing and a welcome change of pace because with your view Dan which most liberals have, we always just say-the people agree with us they just don’t know any beter. The people themselves-many of them-really have been very disappointing. It’s naive to not see that there are winners and losers in any major policy changes. It’s not suprising that citizens are pitted against citizens.

    I agree that most people are uninformed but there is something called “rational ingornace” that is a rational attitude based on how little you know.

    This is what Newt’s gambit about promising $2.50 gas was all about. Yes, it was absurd and impossible for anyone who knows anything about economics. But most people dont, dont really want to know, the average American is totally math phobic even about simple arithmetic.

    So while Newt’s promise was silly how would they know? All they know is that gas prices are going up every day.

    I do think there is something to Steve’s idea of “median influencer”-this person is not just a wealthy banker of wealthy banker’s wealthy lobbyist.

    For example assuming we had two candiates one who promised $2.50 gas-that is to say Newt-and another said they would give us 5.5% unemployment who would people choose? We’re presuming in this thought experiment that voters just assume these candidates can fully keep their promise-we don’t scruple over asking how they expect to achieve this.

    As to which outcome would be better for the economy it’s a no brainer that we would rather have 5.5% unemployment but I think many people might choose $2.50 gas. Why? Remember the median American, certainly the median American voter is employed. As most Americans are employed as Bryan Williams points out many would say out of rational ignorance-screw the lazy unemployed. I work why should’t my gas prices come down before anything for thoes “deadbeats.”

  20. Bryan Willman writes:

    re: @Max Sax – but wait, there’s more!

    I’m employed. I vote for the 5.5% candidate. What observable return do I get that I can verify? Probably Zilch.

    I’m employed. I vote for the $2.50 gas (or the fixed bread prices, or some other subsidy as exists all over the world) what *might* I get, that is *observable*? Much less of my apparent income spent on fuel. What’s more, if I don’t get that, I have a reason I can articulate to vote for the OTHER $2.50 gas candidate in the next cycle. I’m surprized the idea hasn’t really caught on – maybe people aren’t as fooled as we think.

    Now, any reader let alone commenter on a blog of this quality surely knows this is some kind of fools game – yet one regularly reads about riots in this or that place over the removal of this or that subsidized product. If Newt set up a system of subsidies in which everybody got gas for $2.50 (even up to some limit) there would be political or civil unrest if anybody later tried to remove it. (Just as unwinding or even restructuring social security or medicare will be nearly impossible now. There will be no way to change them EXCEPT by saying the changes apply only to “other” people.)

  21. Mike Sax writes:

    Bryan Williams, my point is that in a macro sense we’d be much better off with 5.5% unemployment. In reality we had $1.89 gas when Obama came in like the Republican spinmeisters tell us. But what came with that low oil? A huge delfation of the whole economy where we were then losing 750,000 jobs a momth and NGDP dropped through the floor.

    the point if that rational ignorance enables people to make “rational” decisions within their great ignorance in a narrow, selfish way.

    LIke you put it above the median voter has too much to lose to do anything but prevent what we need so that the whole thing falls apart and the riots will come to that median influencer Steve talks about.

  22. Morgan Warstler writes:

    It amazes me with insight like this:

    “Consider NGDP targeting. Under this policy rule, Treasury securities would become risk assets, whose real return would be geared to the health of the economy. (NGDP path targeting implies that shortfalls in real growth must be matched by increases in inflation.) Treasuries become low-beta index funds, diversified claims on the real production. Nominal yields would be more stable, but the real value of a future payment becomes as uncertain and volatile as the business cycle.”

    You don’t pick up the far more compelling part of NGDLT that the same polity would love.

    The moment you adopt NGDPLT, productivity gains are REQUIRED in the public sector.

    1. When you are at 4.5% trend (4.5% RGDP and 0 inflation) and threatening to have to raise rates…. WAIT!!! Let’s cut back on public employees, that will reduce NGDP and give us a long period of low borrowing rate for the public sector

    2. When you are at 4.5% trend (zero RGDP and 4.5% inflation) public employees do not get cost of living adjustments.

    When Barney Frank and FF in 2004 and dreaming up bad credit risks getting homes….. BAM! rates start to rise mercilessly until Main Street beats down the door to END HIM.

    Under NGDPLT, during the REAL Keynesian theory holds: during good times public employees don’t get raises, so in bad times they don’t get fired.

    —-

    You give savers that, and they won’t even blink about the riskiness of T-Bills. We CAN’T be Greece, so they won’t worry.

  23. Morgan Warstler writes:

    correction “Let’s cut back on public employees, that will reduce NGDP and give us a longer period of low borrowing rates for the PRIVATE sector”

  24. Travis Fast writes:

    SRW,

    You wont like the form but here I go into the breach:

    Non, non, non, no. It is institutionally rigged to give that result. It would be revolutionary to do otherwise. I beg, no I grovel, please do use that big brain to get the big picture. Cognitive dissonance is all that stands between us and them. And I know that last phrase is cognitive dissonance inducing, but we are having way more fun over here. Join the party!

  25. Dan Kervick writes:

    Well Dan I would vote for the guy who said that though maybe I’m the only one who would. I do find Steve’s take different and intersting. You just want to reaffirm the usual script-the evil banks vs the sainted-but ignorant- people.

    They are not sainted, Mike Sax. But people who read economics blogs overestimate, I believe, the degree to which public endorsement or rejection of economic policies is based on motives that economists would find fully intelligible.

    For any American older than maybe 40, not just those on fixed incomes, “inflation” is likely to be viewed as the name of an economic pathology. There is nothing good about it in their minds. Inflation is also the thing that ultimately provoked the general assault on labor in the Reagan-Thatcher era, which succeeded in cutting the correlation between productivity and wage growth for a generation, and is also responsible for the moderation of price increases.

    They did’t whip inflation with monetary policy. The monetary policies promoted by the monetarists back then – that called for targeting monetary aggregates – were a total failure, even in their own terms.

  26. Oliver writes:

    Not sure about the technicalities or the implications, but could one not try to target a conversion of asset price AND consumer price inflations? That way, the level of price increases really would become irrelevant.

  27. Mike Sax writes:

    “Let’s cut back on public employees, that will reduce NGDP and give us a longer period of low borrowing rates for the PRIVATE sector”

    Morgan have you seen rates lately? They are at historical lows. There is no worry about us becoming Greece. That’s just a scare tactic so we cut public employees and lots of other stuff like ending Medicare like your buddy Paul Ryan wants to do.

  28. Mike Sax writes:

    Dan what you say about inflation phobia makes my point. People are “rationally ignorant” they don’t know what’s going on but based on what they think is going on there is a cetain ratiaonlity though of a rather self-interested narrow minded sort. Just they same I do think that older Americans have basically made a deal with the GOP where as long as you protect their ass you can do what you want to future generations.

    Whatever caused the crushing of inflation in the early 80s I don’t see as a good thing. As Steve suggests the drop of inflation risk has not been all to the good.

    I do think that in the US and Britain unemployment was deliberatly pushed up to bring down iflation. Do you have a different theory of what happened to inflation in the 80s? We saw Volcker’s policies spike unemployment to 11.3%

  29. Mike Sax writes:

    Again Dan, we do need to inflate-some at least not to the double digits of the 70s- and I would vote for any candidate who said that.

  30. [...] up here. Share this:TwitterFacebookLike this:LikeBe the first to like this post. from → Links [...]

  31. [...] Warring constituencies and the unintended choice of depression.  (Interfluidity) [...]

  32. anon writes:

    “Consider NGDP targeting. Under this policy rule, Treasury securities would become risk assets, whose real return would be geared to the health of the economy. (NGDP path targeting implies that shortfalls in real growth must be matched by increases in inflation.) Treasuries become low-beta index funds, diversified claims on the real production. Nominal yields would be more stable, but the real value of a future payment becomes as uncertain and volatile as the business cycle.”

    I’m not sure that this is correct. NGDP targeting is only affected by aggregate supply shocks, which are (1) comparatively rare and (2) something you might want anyway, as a typical bond-holder. Under inflation/price level targeting, bondholders are not made worse off by negative supply shocks, but they do not benefit from positive shocks either–the average expectation is unchanged. Moreover, given the importance of debt claims to the overall economy, it may not be economically sustainable to protect all bondholders from negative supply shocks, any more than it is for “everyone” to hedge against inflation. Hedges should then be allocated to those who would most pay for them, such as retirees seeking to insure a minimal standard of living.

    The “business cycle” comment also seems mostly irrelevant, since NGDP targeting would avoid changes in the nominal economy, which are perhaps the most important source of RGDP fluctuations,

  33. Peter K. writes:

    @ Dan Kervick #25

    It’s really dishonest how you argue that monetarism caused the Reagan/Thatcher attack on labor. Kind of typical of your comments. Look we’re both on the left and want lower unemployment and less inequality and a fairer, more just economy. Why not have an honest debate?

    “Inflation is also the thing that ultimately provoked the general assault on labor in the Reagan-Thatcher era, which succeeded in cutting the correlation between productivity and wage growth for a generation, and is also responsible for the moderation of price increases.”

    Not true. Anyone at all who agrees with you on this? Any links on the Internets? Any books or magazine articles?

  34. Dan Kervick writes:

    It’s really dishonest how you argue that monetarism caused the Reagan/Thatcher attack on labor.

    I said no such thing. My point was that the attack on labor was responsible for moderating inflation, not central bank policy. Monetarism had nothing to do with it. The monetarist experiments were a total and embarrassing failure, and the Fed abandoned them. The Fed quickly learned that the central bank could not not target the monetary aggregates.

    http://www.questia.com/PM.qst?a=o&d=13674186

    Kaldor on monetaris,m

  35. Dan Kervick writes:

    On the broken link between productivity and wage growth, here’s the latest from Tim Duy.

  36. Dan Kervick writes:
  37. [...] Steve Randy Waldman observes the problem: The behavior of politicians, in Europe as in the United States, suggests that the people to which they are accountable are not primarily the fraction of their labor force that is out of work. This is different from the 1970s, when elected officials did seem to behave as though they were accountable to unemployed people, and put central bankers under intense pressure to be accommodative. Something has changed. [...]

  38. Ignacio writes:

    Another asset that policymakers like to protect is housing prices. Retirees, near retirees and homeowners in general don’t like to see the value of their houses plummeting and several measures around OECD countries were designed to prevent or to ameliorate the inevitable housing bust. Most of QE in OECD countries was dedicated to keep the value of mortgage-backed loans. In other words, not to admit that those loans were overiflated and that the collateral value was (is) sinking.

  39. Mike Sax writes:

    So Dan, let me see if I have it straight. Are you saying that Volcker jacking up rates as high as he did-did or did not cause unemployment to hit 11.3%

  40. [...] Here is Interfluidity with an answer that, finally, I really really like. [...]

  41. Karmakin writes:

    I really like this whole concept. I’m not sure if it’s 100% correct (is anything of this nature ever?), but at the very least it’s a step forward I think from conventional political and economic discussion.

    When we’re talking about inflation fears among a large section of the population, we have to remember one very important thing. We’re by and large not talking about a rational reaction. I’m not saying it’s irrational. What I’m saying is that people are not actively thinking about the big picture. They see prices go up, that’s bad. It doesn’t matter if it is due to rising base ingredient costs or rising labor costs or if it’s simply profit-claiming due to less competition in the marketplace, it’s all the same thing.

    And boy does it piss people off. Hell, it pisses me off, and I’m one that would always choose the 5.5% unemployment rate.

  42. [...] rhetoric suggests the politicians weren’t as beholden to the median-aged voter as they supposedly are today. Share this:EmailPrintLike this:LikeBe the first to like this post. This entry was posted in [...]

  43. Dan Kervick writes:

    The Volcker shock therapy definitely had an impact on employment, Mike, but that had nothing to do with monetarism and the policy Friedman and the monetarists had recommended regarding targeting the “supply of money.” Volcker couldn’t control the supply of money. They abandoned the official policy of money supply targeting – which was probably just a gesture to faddish monetarism – when it was no longer possible to hide the fact that the monetary aggregates seemed to have a life of their own, and were uninterested in Fed policy. The real shock therapy was all about astronomical interest rates, unrelated to monetarist theoretical constructions.

    The period saw a two-pronged financial and political attack on working people. As a result, we had decades of low inflation, declining worker bargaining power and wage pressure, financial bubbles and financialization of the private sector, the political acceptance of unemployment as a fact of life, and growing inequality.

  44. Mike Sax writes:

    “The period saw a two-pronged financial and political attack on working people. As a result, we had decades of low inflation, declining worker bargaining power and wage pressure, financial bubbles and financialization of the private sector, the political acceptance of unemployment as a fact of life, and growing inequality.”

    Ok Dan we agree-about this and the failure of Monetarism to control the money supply.

    Of course this attack on workers-which Volcker did successfully sustain-is what enabled Reagan to hit unions so hard like with the airline workers. He could never had done that without the Volcker induced 11.3% unemployment rate.

    In the 90s Greenspan didn’t have to raise rates anymore because even with unemployment so low the labor unions had been neutered.

  45. BruceMcF writes:

    It does indeed seem to be a choice, but note that “who gets to choose” is largely determined by institutional structure. Since the choice being made is the not only revealed preference but also expressed preferences of a large group of transnational corporations who are actors in each of Japan, the United States and the EU would be expected to result in the same policy choice if the preferences of those transnational corporations rule the roost in each. As arguably they do. The institutional details as to how and why those same participants came to rule the policy roost in each could vary widely, so long as that was common to all three.

    That would suggest that if there are institutional change that overturns the status quo policy dominance, it would be quite likely that the three would each go their separate ways.

    As far as the differences between Japan/US/EU choices and Australian choices, note that they are differences in degree rather than differences in kind.

    Perhaps the mining companies and Big Oil are not necessarily entirely in line in terms of their policy preferences ~ or perhaps that being a source of consumers to sell Chinese goods to on credit, as in the US and the EU, and being a source of real resources required for Chinese production, as in Australia, modifies the preferences of transnational corporations with respect to the different economies.

    However, a key difference between Australia and Japan, the US and the EU as a group is that the latter group is financial markets in the latter group is where transnational corporations largely originate financial capital that is deployed on a global basis in pursuit of their various objectives ~ a transnational corporation primarily looks on Australian capital markets for originating financial capital for Australian operations to hedge against the massive foreign exchange volatility of the Australian dollar.

  46. Fed Up writes:

    More related to the previous depression post but …

    SKIP the whole negative interest rate, private debt, and gov’t debt “thing”.

    Try running an economy with zero private debt and zero gov’t debt.

    And, figure out how to correctly get more medium of exchange into circulation.

  47. Fed Up writes:

    DK #35, “On the broken link between productivity and wage growth,”

    imo, there is also a medium of exchange problem there too.

    http://bilbo.economicoutlook.net/blog/?p=277

    http://krugman.blogs.nytimes.com/2012/04/28/where-the-productivity-went/

    http://www.epi.org/publication/ib330-productivity-vs-compensation/