Miller Time Again

Matt Miller writes

In case you were wondering, Ronald Reagan wasn’t a Drawbridge because he entered office when marginal rates, at 70 percent, were truly damaging to the economy.

This is written to prove that his critique of Ryan and Romney isn't based on extremism. Interestingly, he feels no need to present any evidence at all in support of his assertion. Of course all serious people agree that top rates of 70% are way too high. I guess that's why the US economy did so badly in the 1960s. And, of course, the 40s and 50s with top marginal rates at 90 percent were such a catastrophe. What is the basis for your claim ? I confess I am an economist and have published on the effects of taxes on growth in the Journal of Public Economics. I am aware of no evidence that top marginal rates of 70% damage economies. It is not for lack of looking. Many economists have attempted to find such evidence and failed. Don't you think you should cite some evidence or, at least, name a source, before making a claim outside of your field of expertise ? I think you are ignorant and completely wrong. I think what you mean is that proposals for a top rate of 70% (from for example a Nobel Prize winner and a Clark medalist) are so very far from being remotely politically possible that you write ignorant nonsense about economics. The grim thing is that I am quite sure that Miller never even considered checking for evidence that 70% is too high. It is just something that all reasonable people accept. I don't think he even feels he made any concession there. The Villager debate is detached from evidence. If a position has been politically marginalized for long enough, then it is considered nonsense without any regard for data.

Brad on Ben and the Borg

Department of Huh ?

Borg assimilates Ben.  Although it is forbidden, he must wear the ring to escape.  Third pop culture reference here.


Ben is not being logical.  You can't argue that higher inflation would be worse, because it leads to higher inflation then next time the Fed takes extraordinarily accomodative actions.

The argument is that a higher inflation target would help during this liquidity trap, but it means that just fed funds rate of zero plus new QE1 and QE2 would cause higher inflation then next time we are in a liquidity trap. And that would be bad because ...

Sure sounds to me as if he's been assimilated by the Borg. The claims that Low inflation and the reputation for being obsessed with low inflation are good is dogma.  There is no need for a rational defence.  Rather, it must be right, because it is so implausible.  Anyone can see how higher inflation causes lower real interest rates, but only an adept who has been to the inner sanctum can understand why Ben must never ever wear the ring.

On Graphs and Spin

Brad says US GDP growth is relatively bad because we should have population growth

On pop growth.  I don't see how it helps GDP growth when the economy is in a liquidity trap.  I can see how it keeps inflation low even with rapid GDP growth, but I don't see the relevance under current circumstances.

Also you are arguably unfair to the USA as you start the recession at the US peak.  If you set the German peak to 100% then Germany would be below the US each compared to own peak.

So why am I typing this ?  Look Brad the US is considered the big country with the most expansionary policy.  US relatively bad means Keynes and Friedman failed (to the unwashed pundit masses).

You see the graph as showing that the US is doing nowhere near as well as it could and should.  Others see vindication of Angela Trichet.

Of course you are a social scientist and call em as you see em blogger, so you don't care.  But in case you did, you would be well advised to blog USA ! USA ! USA ! Better than old Europe in every way !

Why does Wall Street Hate Obama

I comment on Drum commenting on DeLong.


I agree with you. I had the first of your two thoughts when I read Brad's post. But I am interested in the second now. I think part of the reason businessmen hate regulation is that the suggestion that they can't be trusted hurts their feelings. But I also think there is something even simpler and older -- they don't like the fact that someone is more powerful than they and can threaten them with fines or prison. No one does, of course, but I think this distaste is particularly strong among those who have fought their way to the top of something. Those with enough money to matter as major campaign doners have long had more money than they can spend; they keep at it, because they want to win. I think this selects people with a male baboon level of sensitivity to dominance and hierarchy and little tolerance for the fact that he ranks below the President.

I think the main thing is your first point. Their feelings are hurt as they are reviled not admired and those who supported Obama expected him to be on their side. But I think there is something to point 2b they are angry that he has shown he has the power to tell them what not to do.

On Salmon on Koos

http://blogs.reuters.com/felix-salmon/2012/04/16/why-richard-koos-idea-wont-save-the-eurozone/

I don't get it at all. Koo and you agree that tax cuts won't stimulate as the money will be saved, but also assume that increased government spending must be financed by debt. Given the analysis, the solution is clearly increased government spending and reduced budget deficits financed by massively increased taxes.

In other words my advice for, say Rome, where I live, is raise my taxes.

Also note that the huge Spanish capital account deficit implies a huge current account surplus. The rest of the world is doing for Spain that which the Spanish government can't do. Spaniards are buying foreign bonds and foreigners are buying Spanish goods. This is part of the solution not part of the problem.

DSGE forecasting again

The DSGE models which do a bit better aren't DSGE models. Nthe Baa-Treasury spread is added as an explanotory variable without any discussion of micro founding it. I claim that the model which does poorly rather than terribly is an ad hoc aggregate model without micro foundations.

Also, the outcome on the graph is not the BEA's current estimate (-8% at an annual rate). This means that the outcome as re-estimated months before the publication date of the post is well outside of the 90% confidence interval except for the last panel which shows an ad hoc model using contemporary data.

Finally why no forecasts using data from the trough ? There is no evidence in the post that the DSGE model had any success forecasting the recovery. The good looking figure adds another variable ad hoc. Oddly it just happens to track GDP the growth rate very well.

Comment on John Williams

This is a comment on an article excerpted by Mark Thoma here

http://economistsview.typepad.com/economistsview/2012/04/the-slow-recovery-its-not-just-housing.html#comment-6a00d83451b33869e20167652acf19970b

It's not just housing ? Oh really. Oddly discussion of actual evidence tends to get back to housing. For example, search fo "For example". I recall two. On tight credit the "example" is tight mrtgage standards. The claim that small businesses also have a problem with tight credit is not backed up with evidence. I note that only the normal tiny fraction of small businesspeople say their worst problem is "interest rates/finace" .

Then on QE worked. "For example" QE I purchases of mortgage backed securities. There was no discussion of QE II in the article. There was no distiction between opration twist and low forecast inflation, low forecast groth and his own proposal to keep the short term rate low. I would say that twist sure seems to have worked (although no evidence is presented in the article). But I also think the case for QE II consists entirely of conflating it with the other two interventions. In particular no evidence was presented which challenges my conviction that investors treated 7 year notes and cash as close substitutes.

On Benen on fact checking Romney

It won't work, but, if I were you, I would contact Politifact and Glenn Kessler at the post. They are not listing over 10 howlers a week. Politifact definitely reports multiple instances of the same falsehood. To say something false once might be ascribed to misfortune, to say it twice after the error was reprted suggests deliberate deceit.

I'm pretty sure you won't get anywhere with them as being non MSNBC MSM they feel that professionalism requires them to give Republicans a break if the alternative is an unbalanced conclusion. But it's worth a try.

Also Bush hell what about Nixon. His campaigns are not on the web, but I have no doubt that by today's standards they were serious, honest and focused on policy substance. Someone should compare the public honesty of Romney and Nixon. I sure won't. How about Rick Perlstein ?

On N Smith on Lucas

Smith politely criticized Lucas.  I am very rude in comments.

Let no one mistake this comment as other than an attack on Lucas as an economist.  In "Econometric Policy Evaluation: A Critique" Lucas made no claim of originality.  He wasn't just being modest.  The paper starts with a literature review in which Lucas quoted many papers which made the point.  Someone who was there (Larry Summers) noted that when the paper was presented, the general view was that everyone knew that.

Lucas has made an extremely influential contribution to the study of the history of thought -- he has somehow convinced people that before Lucas macro economics was dominated by idiots (such as Sameulson, Solow and Marshack -- I mean really is it plausible ?).

You kids jump from the Lucas critique to DSGE.  Back in the day, there was a period of fascination with the Lucas supply function.  It is now agreed that this was a totally silly idea, not just wrong but silly.

The Lucas growth model is due to Uzawa.

Lucas did some interesting work on General equilibrium with multiple agents based on Lawrence Weiss's demonstration that results with the Lucas supply function depend on the assumption of symmetric information.  No huge deal but a contribution.

The DSGE model was presented by Arrow and Debreu in the early 50s.  The original contributions of Keydland and Prescott were two.  The first was to make critical totally implausible assumptions such that there is a representative consumer -- this makes a huge difference (as was well known as a topic in first year graduate micro).  It is totally implausible.  The implications are totally false.  It is not an advance.  The second is to claim that a very simple DSGE model with parameters supported by long term trends or micro data gives implications similar to the data.  This is, as have notetd in this blog, a totally incorrect claim.  This was not an advance either.

You mention in passing that DSGE models might give useful policy guidance.  You know and hint that this is just because "might" makes right.  So *might* astrology.

In contrast, the theory of phlogiston fit facts and made it possible to predict thre results of experiments.  I see no basis for a comparison of the scientific status of research on phlogiston and DSGE macro.  Nor was it a dead end -- Lavoisier's experiments sure seem to be attempts to measure the amount of Phlogiston in mercury.  The model was strongly rejected by the data as the measured amount was negative.  Science advanced as it does when models are tested and rejected -- provided they aren't assumed to be useful approximations even if predictions based on the models aren't confirmed.

On Krugman vs DeLong on the alleged shortsge of safe assets

http://delong.typepad.com/sdj/2012/04/delong-and-caballero-and-others-smackdown-watch-paul-krugman-asks-if-there-is-really-a-global-shortage-of-safe-assets.html#comment-6a00e551f0800388340163040ce727970d

Brad really. First as you note allll the time the dividend yield should be r-g where g is the expected growth rate of dividends. Krugmans theory is that safe r is low because expected growth is low. That naturally translates to low g. Second, the r in the equation you love above all other equations, is a risk adjusted required rate of return, not the safe r. You position is that the equity premium is unusually high, but here it is important to decide if we want to measure the risk premium as r/rsafe or r-rsafe. As I recall (in one of my most terrifying memories) you could prove it should be r -rsafe in your head while writing 60 words a minute. That's what theory suggests for constant risk.

R-rsafe ( as we both like to stress) is normally huge. Something like 0.05 with rsafe around 2 and g around 2.5 to 3. rsafe is now about 0 so a perfectly ordinary equity premium correspons to growth of 0.5 to 1. Very low, but you have noticed that Krugman is very pessimistic. Expected g of 2.5 should imply a dividend yield of about 0.025 . I just looked it up and found an S&P 2011 yield alleged to be 0.019. But the newish normal for the 21st century seems to be less than I had guessed -- 0.04 to 0.045 but rather 0.3 to 0.35 so my new guess is it should have been 0.01 or 0.015 not 0.025 and I have a big big anomaly of 0.04 to 0.09 to explain. This is a series which has varied from 0.03 to 0.08.
http://blogs.smartmoney.com/advice/2011/12/30/why-the-dow-clobbered-the-sp-in-2011/


I really see almost no puzzle for Krugman at all.

Also, as always, I suggest looking at corporate bond rates. Nominal corporate bond rates are low. Differentials with Treasuries are higher than in say 2006 but lower than in 2003 (except for total junk). The differentials are tiny miniscule and microscopic compared to late 2008 and early 2009. The current malaise looks very different from the omigod the world is ending months. Your analysis is quite similar.

I am getting bored agreeing with Krugman all the time. I do note that I have been arguing against the shortage of safe assets hypothesis for over a year right here in comments on this blog ( one of which you kindly pulled back to the blog).

This is ironic. Benen uncritically linked to the Kilgore post, so I let him haveit in comments

The sensible refutation of Ryan's claim that welfare reform worked in the late 90 s is that everything and the opposite of everything worked in the late 90s. Welfare is still reformed and reformed welfare is not working (click the links in Kilgore's post).

I hate to agree with Ryan about anything, but Kilgore's version of history is absolutely innaccurate. Kilgore claimed that the1993 expansion of the EITC was an "important" part of the 1996 welfare reform. I note that 1993<1996. Kilgore's post on welfare reform is based on an "important" claim of fact which is also totally incorrect.

Since you linked to the post, you should update this post to note the gross error of fact in post to which you linked.

By theway, when I pointed out Kilgores error to him, the person who was deputy assistant secretary of the treasury when the EITC was expanded replied "ouch" and note that the expansion which was not part of welfare reform, was included to ameliorate the distributional impact of the BTU tax (which was replaced by a 4.7 cent a gallon gas tax in the final 1993 "recovery act" bill which increased the EITC and which was not welfare reform).

Kilgore disapproves of progressives who are playing into Ryan's hands by reporting facts damaging to the case for welfare reform. I actually agree that egalitarianism is harmed by noting the facts which make it hard for most Americans (who love welfare reform) to agree with reality based wonks. I just think that journalists should place accuracy above serving the Democratic party. Anyway, Kilgore
has a right to his own opinion but not to his own facts. His claim that Ryan's proposal is not at all like welfare reform rests on a false claim about recent history.

On Simon Wren Lewis

I note that you provide neither evidence nor reasoning in support of the claim that Microfounded model building is a very important and useful thing to do.". Notably the core-periphery hybrid model is vulnerable to the Lucas crtique. What does the core model add which is useful ? Having a model which is not confronted with the data written down adds what exactly ? Does the core-periphery model fit the data better than a model which is not based on adding inconsistent equations to a logically consistent core ?

You note someone's (King's I assume) determination to include a logically consistent core ( then add inconsistent equations before making predictions or guiding policy. As presented, this seems to be a matter of intellectual fashion. Evidence doesn't appear in that stage of your story (as it does in the stage of adding ad hoc corrections to thecore model).

I don't know where to put this, but Mankiw's use of the word " scientists" has no connection with practice in the natural sciences in which, historically, theories bow to facts. Can he explain why he did't write "mathematicians" ?

Finally, what basis is there for the claim that the "better journals" are better than other journals ? They are presented as journals publishing social science, but empirical success is not required. You note correctly that they have huge status in the field, but do not address the question of whether this has anything to do with science, reality, understanding, insight or intellectual progress.

Oh I am getting rude as usual. So, before hitting publish, I want to thank you on behalf of at least UK residents for not sticking with an elegant model which does not fit the data. As I understand this post you et al rendered a false but fashionable model harmless. This made the UK a better place and I applaud your intellectual courage.

More Kilgore

I commented that I agreed with every word in the post above. Not this one. Why do you think it doesn't make much sense for tax fairness etc ? It makes a whole lot of sense to me.

I sense a centrist reflex -- like Obama you feel the need to agree in part with the view you go on to reject. You also love to set up straw men. I think that the trick of ascribing "overriding" to some in your party fails twice. First, since you couldn't identify any such person (until I volunteered in the first paragraph of this commen) the rhetorical trick is obvious. Second, "overriding" isn't an extreme enough word to serve your rhetorical purpose. This is a key issue on which a solid majority absolutely rejects the Republican's overriding priority.

Can you come up with a hint of a shred of an argument for your view that it should't become an overriding issue for Democrats ?

Kilgore centrist

We don't think centrism is the yellow line in the middle of the road, we think it is the dead armadillo. SadOldVet is rude and the past is past, but "maximum" and "unambiguously" are cheap rhetorical tricks which don't work here. Don't stab a straw man in the back.

Note that the word "gullible" was used as a necessary qualifier. The implication is that not all centrists ae gullible. Krugman clearly thinks Obama has learned his lesson ( and what could ever be more useful to Obama than Krugman denouncing his alleged centrism?).

I think the 1 dimensional representation of ideology is astonishgly useful, but can be overdone. In particular, the mederate center of US public opinion does not have a view on taxes on the rich between Obama and Romney but much closer to Obama. They clearly are more enthusiastic about class warfare than Obama admits in public to being. This is demonstrated by dozens of polls going back decades.

The winning strategy is based on defining centrism as standing up for the interests of the US middle class (I sincerely am more concerned about the problems of the third world poor so I should be shunned).

The odd thing about your debatewith Krugman is that you both agree with Obama's current rhetorical strategy. I shudder to imagine what you would write about each other if you actually disagreed about anything.

I hate the captcha, but this one is perfect. It is "ISAbout popolo" . Exactly, it is about the people and populism.

I told you so

Kevin Drum notes that Mitt Romney really is extraordinarily unpopular compared to candidate major party candidates in past years.

I tell him that I told him so again and again.

This  isn't news.   Romney has had extraordinarily high unfavorables for a while now.  

Once you said this wasn't as true as the media want us to believe (language policing -- "media" is plural "as the media wants you to believe" should be "as the media want you to believe" or "as the medium wants you to believe")http://motherjones.com/kevin-d... I said you were wrong in comments.You wrote that  the unpopularity of Republican 2012 hopefuls was "much more the rule than the exception"http://motherjones.com/kevin-d... I typed in comments that you were wrong.Later you asked if Romney's high unfavorable rating was  normal.  I told you it wasn't http://rjwaldmann.blogspot.it/... 

The extraordinary astounding unique data can't be ignored anymore.  

I love to type "I told you so" but I told you so, again and again.

Drum has noted this before too, but only after I had told him so as I comment in a partially polite second comment.

Of course you have noted Romney's extraordinary unpopularity repeatedly too.  But I was convinced when you were still skeptical.

Shedding Luce

Brad finds it impossible to disagree with Ed Luce.

I find it possible to disagree with Luce.  He writes "AIDS and other diseases" and "fashionable diseases."  Kim's major accomplishment came in fighting TB not AIDS.  I guess TB is a bit fashionable (the Gates's are interested).  Fighting TB is also very hard as half therapy is much worse than none, because it selects drug resistant TB.  Kim is alleged to have managed to arrange directly observed therapy (making sure people take all the pills) in the third world.

Of course Okonjo-Iweala also has huge extraordinary accomplishments.  Such as ... ?  Luce doesn't mention any.  He notes that she is now powerful and has already held a top position at the World Bank.  Favoring insiders sure doesn't sound "meritocratic" to me.  Others have noted that Okonjo-Iweala is very smart.  Luce doesn't seem to consider that relevant.

It seems to me that Luce decided that Kim is the wrong choice strictly because of his nationality.

I stress that I don't necessarily disagree with Luce's conclusion, nor do I think his reasoning is unsound.  I don't see any reasoning at all.

Mitch a Sketch

Ed Kilgore advises Democrats to not throw their Etch a Sketches away.



I absolutely agree.  In fact, the themes of Romney the ruthless vulture capitalist and Romney the flip-flopper complement each other (even more than Kerrry most liberal flip flopper did).  In each case he can be portrayed as being unscrupulous willing to do anything to get money then or power in 2013.  Each mean he is someone from whom one wouldn't want to buy a used car.

The polling is unclear.  The reason is that Obama has been under attack for years.  Most people haven't begun to examine Romney.  I'm sure they can be convinced by video of him saying one thing and its opposite with the exact same tone and expression (he only has one).  Political junkies consider Romney a totally outstanding flip flopper. We are sometimes leading indicators.  Also, on topics other than his own core beliefs (or the absence of same) Romney lies extraordinarily often even for a politician.

The assertion that Romney is completely unprincipled and untrustworthy has the additional advantage of being true.

Brad at Brookings

The guy was presenting a paper and he had energy to consider other presentations.  How many brains do you think are in that skull.  I guess at least three.

3 Separate Comments

3) on Mamelukes. Huh ?!?!? What about Egypt ?  Yes it is mostly desert, but the people live in the Nile valley -- ground zero for extracting taxes from agriculture.  This is where excess grain beyond that needed to feed the farmers was produced.  This was where farmers couldn't run away and farm somewhat less valuable land under another lord (or no lord).  Or maybe ground zero was Mesopotamia.  The Ibn Kaldun hypothesis makes less than no sense.  It is a common story for the Arabian Peninsula on the one hand and Egypt and Mesopotamia on the other.  But clearly they are the most nearly opposite ecologies in the old world.  Egypt has been under central control or a province of an empire longer than any other place.  Saudi Arabia competes with Afghanistan as the area where empire feared to tread (or didn't bother).  The idea of a border (along with the first geometry) came from Egypt.  Saudi Arabian borders were not defined on maps drawn in my lifetime.  The places to look to test Erich Chaney vs Ibn Kaldun are Egypt and Iraq not Iran. 50 years hah.  The experiment is well under way.

1) Stock Watson and Blinder together say a drop in aggregate demand has about the same effects no matter what the cause.  Keynes would not be surprised by this.  It is a problem for newKeynes (have I mentioned that I think that  newKeynes seems to have more to learn from Keynes than vice versa ?).  To the extent that the dynamics are similar, there is evidence that money isn't so very special after all.  This isn't just trouble for Friedman but for all of his followers, that is all mainstream macro-economists.

2. Gauti et all I like your insistence on fiscal not monetary policy.  Many of my critical comments on this blog were comments on posts in which you discussed useful things the Fed could legally do.  But I didn't disagree 100% then and so I don't agree 100% now.  The Fed can irreversibly expand the money supply if it buys a huge amount of illiquid assets.  This is not good strategy for an investor as one loses huge amounts of money that way.  Ah yes loosing money is irreversibly supplying money.  If the Fed manages to have more liabilities than marked to market assets, then it can't retire the liabilities.  Now this means using open market operations to give money to financiers.  I'd much prefer giving it to ordinary people by cutting T.  I also prefer increased G to reduced T.  But the Fed can commit by trading very badly.

To be serious.  If the Fed buys risky assets there are two benefits. One is the one you have been stressing since 2008, that the supply of risky assets to the private sector is too high and this is the root of the problem.  But the other is that if things go bad, the monetary expansion can't be reversed (can't retire liabilities if your assets aren't worth that much).  So the Fed commits to an irreversible monetary expansion if things go badly.  The fact that it transfers its mark to made up balance sheet profits to the Treasury but the Treasury doesn't give the money back, makes it easy for the Fed to gamble -- win for a while and then get stuck so it can't reduce the money supply when it finally looses.

The problem is that if the economy tanks, then the Fed can't avoid creating high inflation expectations (because it will not be able to retire the huge pile of money).  Is this a bug or a feature ?

This approach is within the Fed's current legal authority.  What's the problem ?

If you stuck Jon Chait end to end, he would reach a consensus

Jon Chait writes

 Ryan explained that there’s a growing bipartisan consensus that we should close tax deductions and loopholes and lower rates. “What we have here on tax reform is a new emerging consensus,” says Ryan. “The president and his party leaders are outside this consensus even though his own treasury secretary says the better way to go is to broaden the base and lower rates.”

Now, there’s not really a growing consensus that tax reform is good. The consensus has existed among economists forever.

and I throw a cow.

Consensus among economists ?  You must be joking.  I am an economist and I absolutely oppose lowering rates whether or not loopholes are eliminated.  As to loopholes, well it depends.  Should we eliminate the mortgage interest deduction ? Sure (but not yet -- and not quickly -- low housing investment is a problem now).  The deduction for charitable contributions not so much.  Tax employer provided health insurance when the Republicans stop trying to kill Obamacare (that is on the first of never).  Eliminate the R&D tax credit ? Why are you nuts ? Eliminate the investment tax credit ? Why tax reinvested profits at all ?

No one like tax expenditures in the abstract (as almost everyone dislikes high government spending in the abstract).  It is impossible to get a consensus once one discusses which deductions to eliminate.

You have long supported broadening the base and lowering rates.  The economists who basically agree with Paul Ryan have long supported tax reform.  Most non Randian economists do to. But many of us don't.

If you want to claim there is a consensus, show me a poll. Also one on just what should  capital gains tax rates, tax treatment of capital income and top income tax rates.  On the second set of questions, I am willing to bet a small amount of money at even odds that most members of the American Economic Association disagree with Ryan about the direction in which policy should change.

Derek Thomson is a bit confused. The graph shows the growth of total real per capta government spending, that is federal plus state plus local. This is explained in the comment thread of Thoma's post.

I think the extreme pattern of state and local might have something to do with property tax revenues, has at least something to do with California being at the limit due to prop 13 and Schwarzenegger, and has a good bit to do with the Republican pickups in State legislatures and governors' mansions in 2010.

In any case it is not reasonable to blame Obama who did most of what he could for state and local governments in the ARRA. Blame Ben Nelson for trimming the fat, frying the bacon and milking the sacred cows (and loving it) instead.

On
http://maddowblog.msnbc.msn.com/_news/2012/03/20/10779346-forget-what-youve-heard-from-the-gop-about-spending-and-regulations#comments