Monthly Archives: May 2011

Could it be a Movie? (Economist Superhero)

We’ve all seen movies or other forms of drama where the hero comes to a belief or knowledge of some huge threat and then tries to warn the world at large.  His or her passionate warnings however fall on indifferent or hostile ears.  Think of Chief Brody in Jaws tell the mayor of deadly shark attacks to come.  These things always focus on physical science, never economics.

Yet it can happen in economics as well.  Or at least there is a similar story about the “Great recession”.

The conventional wisdom as the economy unwound in late 2008 was that the real economy was spiriling down and the Fed was out of bullets as interest rates were rock bottom low.  This story seemed to jive with a text book macroeconomics where interest rates can reach a lower bound and monetary policy become toothless.

Yet in the analysis there has been an opponent to this.  See this.

This is  the story basically:

In case the WSJ piece falls behind a paywall, here’s the money graf:

Then, in summer 2008, the Fed committed what Mr. Mundell calls one of the worst mistakes in its history: In the middle of the subprime crunch—exacerbated by mark-to-market accounting rules that forced financial companies to cover short-term losses—the central bank paused in lowering the federal funds rate. In response, the dollar soared 30% against the euro in a matter of weeks. Dollar scarcity broke the economy’s back, causing a serious economic contraction and crippling financial crisis.

Scott Summers waged a somewhat lonely struggle to promote this alternative point of view.   He seems to have made a major impact and has convinced other major economists, including Noble prize winner Robert Mundell who now  tells the story above.

He paid a personal price for his efforts as he explained in the post about two months ago after tireless blogging to promote the idea of monetary policy’s role in  the 2007-2009 recession.

I am complete burned out, and have been for months.  I’ve blogged an average of eight hours a day, seven days a week, for over two years.  I’ve only kept going in recent months out of a sense of obligation to keep pushing these issues.  But now that lots of other people are saying the exact same thing, it’s time for me to take a break.  So I’ll stop blogging for a few months, unless there is some huge news story like QE3, in which case I’ll add a couple posts.  Or if someone does a hit job on my marshmallow post, I may need to briefly respond.  Otherwise I’m done for now, and will return sometime this summer.

I find the whole thing fascinating that an economist could be the protagonist in the story of pushing an unpopular truth but like a movie hero finally triumph.



I plan to return to blogging after July 4th, although with even Nobel Laureates now acknowledging that a tight Fed monetary policy in late 2008 caused the severe slump, I don’t see any pressing need to return.

I do continue to follow the news and make notes, so I promise a very active July of blogging. 


The Grandeur of Yosemite (via Learn More Everyday)

What could I say!!

The Grandeur of Yosemite When I think of the overwhelming majesty of Yosemite National Park, I cannot help but agree with Carl Sharsmith, a longtime Yosemite ranger.  When a park visitor asked what Carl would he do if he only had one day in Yosemite. Carl replied, “I’d go sit by the Merced River and cry!”  And he was right:  There may never be enough time to see all the grandeur of the Yosemite, in all its wonder.  But however much time you have to spend, Yosemite Nation … Read More

via Learn More Everyday

Does This Ease Your Worries?: it Eases Mark Thoma's…

The question is do you believe that the US economy will eventually be at the same level of income, employment, and so that it would have been without a “great recession” or will just resume the same percent growth but from a lower base and never catch back up to where would have been as did Britan as shown?


Mark Thoma is impressed by the strength and reliability of the trend in U.S. real GDP growth:

Does This Ease Your Worries?: US GDP from 1870-2008: As you can see from this picture, historically we’ve always recovered from recessions. Eventually. But as you can also see from the Great Depression, recovery has not always been immediate…. I am confident that we’ll return to trend this time as well, the question is how long it will take us to get there. At this point — with the worrisome signs in recent data — it’s not looking to be anywhere near as fast as we’d like…. So we will get back to trend. But it will be awhile before we get there.

Measuring Worth  Graphs of Various Historical Economic Series

I, too, find the picture impressive. But the U.S. is exceptional. Other countries do not show the same pattern: for example, the United Kingdom never recovered to trend after its post-World War I recession.

And past performance is no guarantee of future results…

Does This Ease Your Worries?: it Eases Mark Thoma’s…
J. Bradford DeLong
Fri, 27 May 2011 16:02:17 GMT

Spousonomics Marriage Survey Gauges Modern Matrimony | Visualizer –

Spousonomics Marriage Survey Gauges Modern Matrimony | Visualizer –

Three questions on the road to sustainability (of the Medical System) :)


If we ever slow health care cost inflation to a sustainable pace, it will be because we learn how to ask 3 simple questions when thinking about a medical treatment:

  • Does it improve quality of life for the patient?
  • Does it extend the patient’s life?
  • How much does it cost?

Asking the questions are of course much simpler than figuring out the answer, and far far simpler than deciding what to do with the answer.

The first step is not demonizing even the asking of the questions. This would represent a profound shift in our culture, and is needed. We need to grow up and learn how to talk about limits in medicine. Then we will have to learn how to give practical answers to these questions, and the answers will have to be knowable and usable at the bed side as doctors and nurses are caring for actual people–you, me, my parents, grand parents and kids. These are not just technical policy questions, but need to become cultural ones as well, asked by all of us, no matter what type of insurance we have.

Then we will have to decide what to do with the answers. None of this will be easy.

The good bad news is that there is a good deal of care that is non-productive, which I would define as care that does not improve quality of life or extend life. We should start there. I don’t know how much health care spending could be reduced by stopping care that didn’t improve quality of life or extend life, but this is the correct way to think about our attempts to slow health care cost inflation. We might have to get into the very hard business of deciding that some care that was productive but very expensive shouldn’t be done. But, we might not; we won’t know until we start asking these 3 questions. Matt Miller and Austin and Aaron have been talking about this today.

The Independent Payment Advisory Committee (IPAB) is a vehicle that could be used to begin to ask these questions. I have been amazed at the level of vitriol against IPAB given past Republican support of similar boards with far more proposed power than what IPAB has. However, if we are forgetting about the past, lets forget about it and reach a bipartisan way to ask these questions, using IPAB as the vehicle since it has the advantage of having been enacted into law.

One practical solution would be for the President to say he is going to name one of the Republican members of Congress who is a physician to be the chair of IPAB. I believe Tom Coburn is retiring in 2012, and he co-sponsored the Patients’ Choice Act that proposed IPAB-like boards. And he uttered the most profound statement of the entire Blair House health policy summit in February 2010 when he said that 30% of medical care is non productive (I don’t know if this figure is correct, but IPAB could start figuring it out). Senator Coburn could even say exactly how the boards he proposed in the PCA were good policy ideas, but the current structure of IPAB is not, and we could enact a bipartisan tweak of IPAB.

I am being totally serious. Anything that moves us in the direction of beginning to ask these questions, to begin to depoliticize the recognition of limits, and to get to the policy. I am not sure I can take another election based on ‘I am not as bad as the other guy’ while serious problems go unaddressed.

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Software picked, likely related articles at The Incidental Economist:

Three questions on the road to sustainability
Don Taylor
Thu, 26 May 2011 14:21:18 GMT

Why does cost effective care spread so slowly

Healthcare Economist

via Why does cost effective care spread so slowly.

According to Fuchs and Millstein, here’s why:

  • Insurers hesitation to standardize coverage.  Standardization of coverage would force insurance companies to compete primarily on the basis of price, which would put pressure on their profits.
  • Employers bear too much of the marginal cost from employees choosing expensive health plans.  Because companies wish to avoid alienating employees, only 20% of large employers require workers who choose more expensive plans to pay the marginal difference in cost.
  • The public does not understand why cost effectiveness is good for them.  The general public does not typically realize that higher health insurance cost are not paid by employers, but by the employees themselves through lower wages in the long run.
  • Legislators need money.  Legislators seek campaign contributions from health industry stakeholders who benefit from the current inefficient arrangements.
  • Hospitals fear cost-effectiveness means lower reimbursements.  Hospital administrators often resist efforts to reduce hospital occupancy for fear that decreases in revenue will jeopardize their ability to cover large fixed costs.
  • Physicians fear pay cuts and loss of professional autonomy.
  • Drug and device manufacturers will lose profits.  Although manufacturer with unique products can sell their goods for a high price, there are alternatives to most medical products.  In these cases, firms attempt to create the perception that their products are unique to justify high prices.  Marketing and lobbying are vital parts of these efforts.

More on macroeconomic policy arguments during the Great Recession


The Great Recession has become a fertile ground for considerable analysis of the prevailing conventional wisdom macroeconomic policies. The relative merits of contractionary and expansionary monetary and fiscal policies are at the heart of all ideological battles.
Conservatives fret at the inflationary effects of expansionary conventional (zero-bound interest rates) and unconventional (quantitative easing) monetary policies and call for tightening monetary policy or atleast oppose any further monetary expansion. They also point to the unsustainable public debt and fiscal deficit and argue any fiscal expansion. Some even argue that all this is crowding out private spending, despite the overwhelming evidence of massive idling resources and capacity in the US economy. Their general belief is that hard money and sound government finances are necessary for a robust recovery to take hold.
However, those advocating expansionary policy, David Beckworth, .
Paul Krugman has been the strongest proponent of the view that when faced with a liquidity trap, increases in the monetary base (which includes bank reserves as well as currency) doesn’t cause inflation, or even a rise in broader definitions of the money supply. Faced with a recession and the zero-bound, businesses postpone investments and consumers their spending, thereby forcing banks to hold on to their reserves. This propensity to hold on to reserves is amplified by the fact that under such conditions, cash and T-Bills become near perfect substitutes, and the Fed cannot therefore expand M2.
Krugman points to the evidence from old and recent history to highlight this. At the onset of the Great Depression, though the Fed expanded the monetary base considerably (admittedly this may have been smaller than was required), it did not result in the expected increase in money supply and inflation remained muted.

Much the same happened in Japan. Despite a dramatic expansion in the monetary base by the Bank of Japan, prices kept falling.

Since the beginning of the Great Recession, the US Federal Reserve has been quick in dramatically expanding its balance sheet and increasing the monetary base. The result – M2 money supply and consumer prices have hardly budged.

However, even among those who favor monetary expansion, there is one group who argue that the Federal Reserve could have done more to avert a deep recession in 2008 and 2009 if it had indulged in much more aggressive monetary expansion. Scott Sumner, David Beckworth and others argue that the central bank using monetary policy tools can do more, even when faced with a zero-bound in interest rates, to stimulate aggregate demand and expand the economy.
They advocate setting an explicit nominal GDP target (or nominal GDP growth path) to shape future market expectations about current and future nominal spending and thereby boost economic growth or prevent aggregate demand crashes. This, they argue, can be done by purchasing assets other than Treasury Bills, like longer-term securities, to lower long-term rates and thereby incentivize investment and consumption spending so as to reach the nominal GDP target. David Beckworth writes,

"Set an explicit nominal GDP level target so that expectations are appropriately shaped. If such a rule were adopted expectations of current and future nominal spending would be anchored around the level target… Even if a spending crash did occur the catch-up growth needed to return nominal spending to its level target would most likely imply an expected path of short-term real interest rates consistent with restoring full employment…
if the monetary base and t-bills became perfect substitutes because the 0% bound is reached the Fed should buy longer-term treasuries or foreign exchange… The 0% bond for us really is not a big deal, but simply an artifact of monetary policy using a short-term interest rate as the targeted instrument."

As David Beckworth acknowledges, this understanding is not that different operationally than a New Keynesian invoking a higher inflation target to lower the expected path of real interest rates or the portfolio channel to drive down the term premium on long-term bonds.
Paul Krugman points to evidence from Japan to question the quasi monetarist position on the utility of monetary policy during such liquidity trap crises. In this context, he also draws attention to the views of the late Milton Friedman who had advocated that the central banks push more reserves into the banking system through monetary expansion. In fact, Friedman had famously blamed the Fed’s unwillingness to indulge in sufficient monetary expansion as the major contributor towards the Great Depression.
However, unlike the Fed in the 1930s, the Bank of Japan indluged in massive monetary expansion. However, this did not result in the expected rapid growth in the money supply or monetary base.

Paul Krugman concludes that "in the face of a really big shock, which pushes the economy into a liquidity trap, the central bank can’t prevent a depression". In the circumstances, the only option left is fiscal policy. Here Krugman points to the critical role that the government borrowing and spending played in making up for the steep decline in private consumption.

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More on macroeconomic policy arguments during the Great Recession (gulzar)
Wed, 25 May 2011 00:31:00 GMT

When US defaulted on its debt…

Mostly Economics

via When US defaulted on its debt….

An Open Letter to Congressman Paul Ryan


Dear Congressman Paul Ryan,

In a recent speech you made the case for a more rules-based approach to monetary policy:

The Fed’s recent departures from rules-based monetary policy have increased economic uncertainty and endangered the central bank’s independence…  Congress should end the Fed’s dual mandate and task the central bank instead with the single goal of long-run price stability. The Fed should also explicitly publish and follow a monetary rule as its means to achieve this goal.

I agree that we need a more systematic approach to monetary policy.  The ad-hoc nature of the QEs adds uncertainty and makes the Fed a political lightning rod for criticism.  Ultimately, this reduces the effectiveness of monetary policy.  So, yes, we need a predictable, rules-based approach to monetary policy.  We also need, however, an approach that responds appropriately to supply shocks.  For example, we wouldn’t want the Fed to follow a rule that would call for a tightening of monetary policy just because a major computer virus shut down most computer systems and, as a result, caused prices to go up.  Instead, what we need is an approach to monetary policy that keeps the growth of total current dollar spending stable so that the booms and bust are minimized.   The good news is there is a way for monetary policy to do this in a systematic manner.  It is called nominal GDP level targeting.  This approach would narrow the Fed’s mandate to single measure and thus make it more accountable.  I ask you to please consider this idea.  

For further reading on nominal GDP level targeting I suggest you read this article, this article, and this article from the National Review.

All the best,

David Beckworth

An Open Letter to Congressman Paul Ryan (David Beckworth)
Tue, 17 May 2011 14:56:00 GMT

FRBSF Economic Letter: Household Inflation Expectations and the Price of Oil: It’s Déjà Vu All Over Again (2011-16, 5/23/2011)

FRBSF Economic Letter: Household Inflation Expectations and the Price of Oil: It’s Déjà Vu All Over Again (2011-16, 5/23/2011).