December 15, 2012
Heritage at the Cutting Edge
[Chinn] ignores the fact that Heritage Foundation economists, like most academic macroeconomists, have put away the old Keynesian model in favor of modern alternatives.
I thought it useful to see some of this advanced analysis in action at Heritage. From Heritage Foundation's Ron Utt -- admittedly a long time ago (2008!):
In the real world, the additional federal borrowing or taxing needed to provide this additional $1 billion means that $1 billion less is spent or invested elsewhere and that the jobs and products previously employed by that $1 billion thus disappear. Regardless of how the federal government raised the additional $1 billion, it would shift resources from one part of the economy to another, in this case to road building. The only way that $1 billion of new highway spending can create 47,576 new jobs is if the $1 billion appears out of nowhere as if it were manna from heaven...
This sounds at worst a lot like S ≡ I [or (T-G) + S ≡ I ] to me, and at best the Classical model I outlined in my post. Certainly doesn't sound like an intertemporal model.
The critique continues:
...Chinn apparently believes that all marginal private spending is for (frivolous) consumption, not for investment. In Chinn’s equations and graphs, where are the changes in investment? Nowhere. By assumption, Chinn’s Keynesian model keeps investment spending constant and capital stock constant in both the short and long run.
When the government borrows a trillion dollars on global financial markets for a stimulus package, does Chinn believe that zero dollars of that is diverted from investment? When the government raises taxes on dividends to 43 percent from 15 percent, does Chinn believe that has zero impact on investment?
Apparently, I = I(Y,i), ∂I/∂i < 0, which is pretty much required in a downward sloping aggregate demand curve (see notes here), means I'm holding investment constant? This comment indicates an inability to understand an undergraduate level textbook model, which is somewhat disquieting.
As a concluding remark, I thank Dr. Furth for highlighting intertemporal dynamics. But one must approach intertemporal considerations with some sophistication. Simple models (with no rigidities) can lead to misleading inferences. I much prefer approaches such as incorporated in this paper. For the edification of Dr. Furth, these types of intertemporal models fall under the New Keynesian rubric.
Posted by Menzie Chinn at December 15, 2012 08:00 PMdigg this | reddit
Hi Menzie, the Heritage Foundation's blog is biased and not worth a second to read, do not waste your time. Same with Mankiw, Krugman or one of the other clowns - politicians turned into economists.
It's like arguing with gun enthusiasts or similar nuts about the second amendment, some people are just hopeless crazy.
Posted by: Johannes at December 16, 2012 04:41 AM
Personally, I think the whole LIBOR issue is misguided.
Could we not ask Gary Gorton to weigh in on the matter? Gorton argues that convertibility and mark-to-market is properly suspended during a financial crisis. I think his arguments make sense (and any libertarian sound read his work--not because it's liberatarian, but because he argues that market-based approaches are inappropriate in crises involving bank runs).
I believe this doctrine also applies to LIBOR. I do not believe that it is in anyone's interest to use "mark-to-market" interest rates during a financial crisis, and that the manipulation of rates was the correct thing to do. And further, I would argue that the Fed should have an institutional framework for doing so. Therefore, an emphasis on fining the banks is merely depriving the Fed of a critical tool in the kit.
I would be thrilled if we might invite Prof. Gorton to weigh in on this matter, as he is arguably our national expert in this subject.
Posted by: Steven Kopits at December 16, 2012 07:06 AM
You realize they aren't writing for you, that they're writing for their audience? And I think your post was linked by their special enemy Krugman and therefore must be dealt with. That they wrote something is considered as having dealt with you. What they actually wrote is unimportant.
Posted by: jonathan at December 16, 2012 07:12 AM
I think jonathan has it right. The people who take Heritage Foundation stuff seriously (e.g., my Republican US Senator) would not even understand the meaning of the partial derivative notation nevermind dynamic (i.e., intertemporal) New Keynesian models. Heritage's intended readers are politically active laypeople with a conservative "free market" ideology, but not having any particular formal training in economics. In their worldview a glossy brochure style web posting is on a par with an NBER working paper or a peer reviewed AER submission. It allows conservatives to read the abstract and announce that they have studies that supports their views just as liberals have studies that support their views. Heritage Foundation provides a veneer of serious sounding policy analysis. It allows Republican politicians (again, like my GOP Senator) to point to some Heritage "study" as evidence supporting some kooky view. Krugman got it right when he accused outfits like Heritage of acting like "entreprenurial economists."
And of course, in Heritage Foundation land it's forever 1979. The economy is always at full employment. Inflation is always on the cusp of going Weimar. And marginal tax rates are always far to the right of the Laffer peak. A policy position for all seasons.
Posted by: 2slugbaits at December 16, 2012 08:16 AM
Steven Kopits: "I do not believe that it is in anyone's interest to use "mark-to-market" interest rates during a financial crisis, and that the manipulation of rates was the correct thing to do."
Conspiracies to manipulate markets to reap bonuses and to screw others? Deception and lack of transparency to keep the proles docile? Hiding the weaknesses in the financial system? I am learning more and more all the time how the conservative mind works. It is fascinating and terrifying at the same time.
Posted by: Joseph at December 16, 2012 10:01 AM
"The only way that $1 billion of new highway spending can create 47,576 new jobs is if the $1 billion appears out of nowhere as if it were manna from heaven..."
This is incredibly ignorant. When output is below potential output,the 1 billion does not appear from nowhere. It appears from putting idle resources back to work.
Posted by: Full Employment Hawk at December 16, 2012 11:42 AM
Don't know how this moved on to Libor, but Steven Kopits has it right - when there is no offer for unsecured cash at any price in who's interest is it to set libor at infinity? In so doing all the interest rate futures would of matured at 100-infinity, the swaps, the bank loan resets, etc etc... And if infinity is not the right price (because there was no offer of cash at any price in financial markets during the most stressed periods) pray tell us Joseph what that price should be? Presumably, you should be the one to 'make up' libor?
Posted by: C Jones at December 16, 2012 12:46 PM
C Jones, the bid rigging UBS is charged with goes back to 2005. This has nothing to do with an infinite LIBOR rate. This was pure bid rigging for financial gain. They were secretly pushing LIBOR a few basis points one way or the other to reap gains or avoid losses of 40 or 50 million dollars a day on highly leveraged derivatives. Even during the crisis they were under bidding the real LIBOR by only 30 or 40 basis points so your infinite LIBOR excuse is pure fantasy. The banks simply found it convenient to lie about their financial weakness in order to protect their shareholders.
If temporary suspension of mark to market were to be required for some crisis, it should be coordinated by the central banks and fully transparent. Unilaterally lying about financial status because it would be inconvenient to shareholders is not an excuse. Unfortunately, the idea of covering up market to market seems to fit the conservative ideal of the authoritarian daddy who lies to the public for your own good.
Posted by: Joseph at December 16, 2012 03:48 PM
I'll check, but LIBOR used to be a pretty boring rate, and borrowers had every opportunity to use a different metric if they wanted. The UBS charges arise from behavior of a Japanese subsidiary from 2007, according to Bloomberg. Other sources trace it to 2005.
But this became an issue due to interest rate manipulation during the financial crisis.
Read Gorton's "Slapped" piece or his book "Misunderstanding Financial Crises", and then comment.
Posted by: Steven Kopits at December 16, 2012 04:40 PM
You can't really refute Salim Furth's point from the Heritage Foundation by quoting from some random Heritage study from 2008. Furth is macroeconomic policy analyst for the Center For Data Analysis at Heritage. http://www.heritage.org/about/staff/departments/center-for-data-analysis
This group runs the macro model that is used by Heritage for policy analysis. That macro model is an adaptation of a commercially available large scale model, the IHS Global Insight model. You can read Heritage's description of that model here:
You can also learn about the model here:
Furth's point is right: Heritage economists are indeed not using old-style Keyensian models. You can critique the model they are using if you want but it is a modern model.
2slugbaits and other commenters, the fact that Heritage does not write academic papers is a feature, not a bug. Heritage focuses on providing actionable analysis, work that will seriously influence policy. Serious people on the left understand how effective Heritage has been over the last 40 years and they've understandably tried to clone a left-wing version of Heritage. As far as I can tell, they've never been successful.
On the other hand, I think the Democrats are now far ahead of the Republicans in using big data, statistical modeling, and experimental psychology to measure and influence the electorate. The Obama campaign executed on all of that masterfully during the campaign while Romney's polling was flawed and the Republican technology-based GOTV effort, Project ORCA, failed in a spectacular way on election day.
Posted by: Rick Stryker at December 16, 2012 05:34 PM
Rick Stryker: I have read the documentation you have referred to. Perhaps you have missed the various dissections of the Heritage CDA's analysis; see    (which I cited in the post and you ignored). I would appreciate seeing your reappraisal of CDA's expertise after you read the assessments.
Posted by: Menzie Chinn at December 16, 2012 09:33 PM
Rick Stryker You said: This group runs the macro model that is used by Heritage for policy analysis.
I believe you intended to say: This group runs the macro model that is abused by Heritage for policy analysis.
Posted by: 2slugbaits at December 17, 2012 04:53 AM
Gentlemen, total gov't spending in the US, including personal transfers, is equivalent to 54% of private GDP and 100% of private wages, and total credit market debt owed is 9 TIMES private wages and its imputed cumulative compounded interest to term is equivalent to 100% of private GDP in perpetuity.
How can the private sector grow in order to support a tax base and receipts to allow total gov't spending to continue at 54% of private GDP or higher?
Add private "health care" spending to total gov't spending, and "health care" (now 28% equivalent of private wages) and gov't spending combined is an equivalent of nearly 75% of private GDP (over 140% equivalent of private wages), having grown at TWICE the rate of overall GDP since '00-'01.
At the differential rates of growth of private "health care" and total gov't spending to private GDP since '00 and '07, the former will constitute 100% equivalent of private GDP by the mid- to late '20s or early '30s.
Obamacare will only increase the cost of "health care" and gov't for the private sector without contributing a net multiplier to real GDP per capita growth.
Granted, if one's livelihood is dependent upon spending on "health care" and local, state, and federal gov't, what's the problem? More is better.
Unless an economist can make an empirical case as to how medical and gov't spending can be an equivalent of 100% of private GDP in the next 10-15 years, and why it's not a problem, private and public debt and gov't spending will have to be reduced to a level that can be serviced by private wages, investment, and GDP per capita.
For Neo-Keynesians (or any persuasion), the question is begged, Is there ever an amount of private and public debt as a share of private wages and GDP that is too much? History and contemporary examples imply clearly that there is such a threshold, yet the conventional wisdom counters that debt does not matter as it only requires that the gov't run deficits and borrow from banks, insurers, pensions, foreign central banks, and individuals with the help of Fed monetization.
Fiscal deficits of 10-15% of private GDP in perpetuity? Sure, no worries, mates.
Posted by: Bruce Carman at December 17, 2012 08:44 AM
Bruce Carmen: Using NIPA 2012Q3 2nd release data, I find the ratio of total current expenditures to GDP ex. government consumption at 43.2%. I don't know where you got 54%. I do agree 43.2% is a high number -- almost as high as 43.4% recorded in 1982Q4 under President Reagan.
Posted by: Menzie Chinn at December 17, 2012 09:21 AM
Bruce Carmen: What's a neo-Keynesian?
Posted by: Menzie Chinn at December 17, 2012 11:09 AM
If the argument is that every dollar borrowed by the government is a dollar taken out of the economy like any other dollar...
then can't that argument be used to say that if we balanced the budget solely through tax increases it would have zero negative impact on the economy?
None of us believe that's so, but the argument that every dollar borrowed is a dollar not available for investment implies a dollar borrowed works the same as a dollar taxed...
whereas we do all agree that spending cuts would have obvious short-term human costs. So while we need to argue, still, about spending cuts and the proper long-term level of government spending, the Heritage argument is an argument for immediately raising tax rates to a level that wipes out the deficit, because the argument that a dollar borrowed is a dollar removed from the economy, period, means that taxing that dollar should have the same immediate effect as borrowing it, and shifting from borrowing to taxing should have no negative short-term effects.
And, of course, fully funding current government expenditures through taxation would have an immense salutory effect on the long-term budget.
Posted by: eyelessgame at December 17, 2012 11:28 AM
Menzie, I'm referring specifically to nominal GDP and TOTAL state, local, and federal spending, including transfers.
Total gov't spending as a share of GDP less total gov't spending is above the peak during WW II spending, having been at or above the peak for much of time since the early '80s.
Total local and state gov't spending as a share of GDP less total gov't spending is above 20% and at a post-WW II high; 74% above the peak during the worst of the Great Depression of the early 1930s; and well above the peaks during previous recessions since the '70s.
Most of the emphasis of the discussion about fiscal conditions in recent years is on federal gov't spending, but local and state spending is at an all-time record high as a share of GDP less total gov't spending by a wide margin. In fact, total local, state, and federal gov't spending to GDP less total gov't spending reached in '09-'10 an order of exponential order of magnitude of differential growth, i.e., Jubilee point, recently from the 1950s.
Referring to your comment about gov't spending to GDP during the recession of the early '80s, total credit market debt owed to GDP was 1.75 vs. 3.6 today, and to wages of 3.5 vs. 8 today. We had the luxury of relatively low debt/GDP and debt/wages and the highest nominal interest rates since the Civil War. The high rates permitted an unprecedented reflationary boom/bubble at falling nominal rates, including the ability to increase total gov't spending to GDP. The reflationary Long Wave Downwave regime ended in '08, and now we face a debt-deflationary Long Wave Trough and Schumpeterian depression.
The total gov't spending equivalent to private wages in the early '80s was 50% vs. 100% today.
IOW, we have reached the point at which the private sector can no longer support revenues to permit further growth of local, state, and federal gov't spending and future debt service costs to additional private and public borrowing. Public and private debt, "health care", and gov't spending to GDP less total gov't spending must cease growing and hereafter contract.
The question becomes how debt deflation and fiscal constraints are "managed", who pays, how much and how soon, and what kind of economy we will have as a consequence. To date, despite public proclamations about "stimulating the economy", the real objective of the Fed (owned by the banks) has been to bail out the banks' impaired balance sheets (still a WIP) with fiat digital debt-money book entry credits to prevent banks (and their equity and debt holders) from taking losses on their loan books, which has been the necessary condition during every debt-deflationary regime in history, including in Japan since '98-'03 when bank loans contracted 30-40%.
Extreme wealth and income concentration and hoarding of savings in the form of historically overvalued financial assets by the top 1-10% is contributing to a collapse in money velocity and slow or no growth per capita of private investment, production, employment, and gov't receipts.
The historical precedents for today's conditions are the depressions of the 1830s-40s, 1880s-90s, 1930s-40s, and Japan since the '90s. We are doing what the BOJ and Japanese gov't has done since '98-'03, only at a faster rate and larger scale to date. The results in a debt-burdened system with gov't spending and demographics dragging on the private sector will not be dissimilar to Japan since the '90s and early '00s.
One big difference between today and Japan in the early '00s and the previous Long Wave debt-deflationary regimes is that we now have a truly global economy with worsening resource constraints and population overshoot; therefore, the debt-deflationary effects will be global and structural.
Posted by: Bruce Carman at December 17, 2012 11:37 AM
Bruce Carman: Yeah, me too. Re-do the math correctly, you'll get what I get (use Table 3.1, line 15, from the latest release for government - all levels - current expenditures).
Posted by: Menzie Chinn at December 17, 2012 01:17 PM
I suspect the difference is that I am including personal transfers for the "gov't spending" figure, which are a cost to the private sector, especially labor.
The additional costs imposed by Obamacare will further reduce labor income and increase gov't spending burden on the private sector.
Total gov't spending has grown an avg. of 1.3%/yr. faster than GDP less total gov't spending since after WW II, and 0.8%/yr. faster since 1970 (peak US crude extraction and the onset of deindustrialization and financialization).
The cumulative differential rate of growth of GDP less gov't to gov't spending recently reached an order of exponential magnitude, implying that gov't spending growth to GDP less gov't spending is over.
Either GDP less gov't spending accelerates hereafter, which is unlikely given the debt and gov't spending burden, or gov't spending must contract, especially per capita.
This is generally speaking the condition facing the PIIGS and Japan today.
The fastest rate of change of increase in the number of Boomers drawing down en masse on federal gov't elder transfer programs hereafter into the early to mid-'20s will further constrain fiscal conditions and real GDP per capita.
Posted by: Bruce Carman at December 17, 2012 03:03 PM
BTW, speaking of elder transfers and peak Boomers, the total number of SS beneficiaries today is ~40% of the full-time employment base, with the total number of SS, SS survivor, and disabled recipients nearing an equivalent of nearly 50% of today's full-time employment.
Hereafter, the rate of growth of peak Boomers reaching age 62-66 will grow at ~8%/yr. (not counting survivors, disabled, and dependents) at an avg. annual benefit of $16,800 for males, $11,600 for females, and $28,400 for couples, or an exponential order of growth of recipients by '25.
The number of peak Boomers reaching age 62-66 (when 66-85% leave the labor force and draw down on benefits) through '25 will be equivalent to an absolute payout of SS benefits of nearly $1 trillion in the meantime, which in turn is equivalent to ~10% of today's private GDP and 17% of today's private wages.
The incremental growth of benefit payouts to SS recipients only will avg. ~1%/yr. of private wages.
The peak Boomer structural drawdown of elder transfers will persist into the late '30s to early '40s.
For the bottom 90% of Boomer recipient couples who have little or no retirement savings or a pension, the combined avg. SS benefit will be less than 60% of today's median household income, whereas the benefit for females will be below the "official" poverty rate today. The future for Boomer retirees in general is end of life at or below the poverty line and a household income more than 40% below the median.
The structural peak Boomer drag effects will both contribute to little or no growth of real private GDP per capita AND be a consequence of same.
Posted by: Bruce Carman at December 17, 2012 03:48 PM
Bruce Carman: I still do not understand how you obtained your 54% number.
Posted by: Menzie Chinn at December 17, 2012 04:07 PM
Bruce Carman By any chance, are you double-counting state/local and federal expenditures? A lot of stuff that is counted as state spending is in fact just pass-through expenditures. For example, the federal government gives money to the states and the states contract with some firm to build or repair the highway. If you're not careful about your sources you could be counting the same receipt and expenditure twice. GDP accounting is not transaction based; it's based on the sum of value added at each stage of production.
For the bottom 90% of Boomer recipient couples who have little or no retirement savings or a pension, the combined avg. SS benefit will be less than 60% of today's median household income,
So are you saying that the economic burden would be less if Boomers had more private saving? An increase in the private saving rate is also an increase in claims against future GDP. No problem if that higher saving also translates into higher investment today, which would increase the economy's ability to support higher consumption in the future. But wait...increasing taxes today is a way to increase national saving. So did you oppose the Bush tax cuts because they reduced national saving?
Posted by: 2slugbaits at December 17, 2012 04:29 PM
Menzie says: "Apparently, I = I(Y,i), ∂I/∂i <0, which is pretty much required in a downward sloping aggregate demand curve (see notes here), means I'm holding investment constant?"
But this doesn't address the meat of Furth's comment. The principal question is whether or not a portion of government spending comes from diverted private spending. According to your textbook response you say no and it's certainly reasonable to question that. To respond to this question with a jab toward Furth just shows you didn't understand the question and certainly doesn't improve your edification.
Posted by: Jeff at December 17, 2012 06:51 PM
Sorry Menzie. I had not seen your earlier analysis on the CDA results and I linked to something that you are well aware of. Nonetheless, my point still stands: Heritage economists are not using simple models where S = I.
You asked what I think of CDA in light of your analysis? I looked over your criticisms and the Heritage analysis, which I had not really seen before and as usual I'm afraid I've come to a different conclusion. What struck me about the
Heritage analysis is how modest and reasonable their claims actually are.
I come to that conclusion not by examining elasticities of certain inputs but rather by inspecting the bottom line output variables: real GDP, unemployment, and tax receipts. In looking at the simulated values of these variables
over the baseline, I think it's all so helpful to compare to alternative models that try to do something similar in order to get a sense for the magnitudes. So I'll use Diamond's analysis of the Romney tax plan using an overlapping generations computable general equilibrium model
and Mankiw's and Weinzierl's http://www.nber.org/papers/w11000.pdf?new_window=1 analysis of the long term effects of tax cuts in the context of a neoclassical growth model.
First, GDP: After 10 years, baseline real GDP is 18,030 and simulated real GDP is 18,431, which is just 2.2% higher. In Diamond's analysis of the Romney tax cuts, he finds that real GDP is 5.4% higher than baseline after 10 years. To
see the small effect in growth rates, the baseline real GDP growth rate is (18,030/14,032)^(1/10) - 1 = 2.5%. The
simulated growth rate under the Ryan budget plan is (18,431/14,066)^(1/10)-1 = 2.7%. So the growth rate differential is 20 basis points per year.
Second, employment: Under the baseline, employment grows (150 - 134)/10/12 = 133K jobs per month. Under the Ryan budget
plan,jobs grow (152 - 135)/10/12 = 144K per month, or 11K per month more on average--hardly an ambitious result.
To contrast magnitudes again, Diamond finds that the Romney plan would produce 6.8 million jobs above baseline, or 6.8/10/12 = 57K, an additional 57K jobs per month.
Third, personal tax receipts: federal personal tax receipts in year 5 are 4% higher than baseline and in year 10 are 2.2% higher. Mankiw and Weinziel estimate that in the long run we should get 17% back from a cut in labor taxes.
Fourth, interest rates and inflation: real rates about 90 bps lower under the Ryan plan after 10 years with inflation about the same.
Ryan asked for non-partisan analysis of the dynamic effects of the budget proposal and that's what I think the Heritage economists delivered. These posts and comments give the impression that the Heritage analysis is somehow way out on
a limb. But when you look at the main output variables, it looks to be modest and reasonable. I think the Heritage economists could have argued for stronger effects than they did.
Posted by: Rick Stryker at December 17, 2012 08:21 PM
Jeff: Well, I guess I should have includes ∂I/∂Y > 0 to make things explicit. Then one would have crowding in. But you are right that I probably gave Furth too much credit for catching that subtlety (as ∂I/∂Y less than zero seems implausible).
Posted by: Menzie Chinn at December 17, 2012 08:24 PM
Rick Stryker: If you think that Heritage's assessment of the Ryan plan was modest and reasonable, I think you must be pretty much alone. I haven't heard anybody rise up in defense in their simulations (and there is that funny characteristic that you can move the ending 2.8% unemployment rate several percentage points up, and leave all other variables essentially unchanged! ). But if that's your idea of a modest and plausible model, let me say I'm not surprised.
Posted by: Menzie Chinn at December 17, 2012 08:33 PM
2slugsbait: The extreme wealth and income concentration to the top 0.1-1% to 10% reduces velocity and the effectiveness of tweaking the tax code and gov't deficit spending at the margin.
Moreover, the top 0.1-1% are where they are in part because of their skill at tax avoidance or deferral, i.e., shifting assets and income sources to various domiciles where gains or rentier income are not taxed or can be delayed.
Labor, saving, and productive, wealth-creating activities are taxed much too highly, whereas speculative and general rentier gains are taxed at a favorable rate, creating incentives for financial capital hoarding (low-velocity exchange), non-productive speculative activity, and all manner of tax avoidance schemes.
It would be infinitely more productive to eliminate all taxes on labor, savings, and production, including SS and Medicare taxes, in favor of taxes on speculative rentier hoarding and tax-avoidance schemes, energy, traffic, waste, pollution, and land resource or place value rents from land (discourage levering up via mortgages scarcity value of land in favor of more productive activity on land).
Equities historically have returned on avg. after price and currency effects only the avg. dividend over the course of successive secular bull and bear markets. Thus, dividends are what equity holders receive over the very long run. Speculative capital gains are received only by a small minority who game the system or who start with a large share of the holdings of equity market cap; therefore, dividends should not be taxed, whereas speculative rentier gains from equities (investment banks, brokers, private equity, M&A, LBOs, stock options grants, etc.) and most other savings and purchasing power substitutes should be punitively taxed to reduce or eliminate non-productive speculative financial activities and hoarding.
The English-speaking world is woefully burdened by costly gov't as a share of private economic activity in addition to the "rentier tax" consisting of imputed compounding interest to perpetual term on virtually all labor, profits, and gov't receipts.
And now we are being subjected to yet another tax on labor and production of goods and services in the form of Obamacare, which is yet another gov't-mandated transfer from the labor product of the masses to the insurance and medical services industries, including doctors, hospitals, biomedical, and pharma companies.
Posted by: Bruce Carman at December 18, 2012 12:03 PM
Menzie: Again you miss the point because you are too preoccupied with looking for a jab. That is one sure way not to advance the conversation.
Posted by: Jeff at December 18, 2012 06:09 PM
I just didn't assert that the Heritage study made modest and reasonable claims. I showed it by examining the actual behavior of the important variables from the simulation and comparing them to results of studies that attempt to do something similar. To say that no one else is defending Heritage is hardly a refutation of this point. It is a reminder, however, that the left spends a lot of time on the attack and the right, unfortunately, spends too little time refuting these attacks.
Posted by: Rick Stryker at December 18, 2012 06:10 PM
Jeff: Perhaps I was a little hard on Dr. Furth when he didn't realize a downward sloping AD curve is implied by a interest sensitivity of investment. Now, crowding out will arise when the LM curve is upward sloping, or when the central bank raises rates when output rises. Crowding in will occur if output resonds positively to output, or -- as in the accelerator -- it responds to output increases, or when collateral constraints decrease when output increases (a la Bernanke-Gertler financial accelerator), or possibly when there are three or more outside assets (see Benjamin Friedman following up on Tobin). I would say all these crowding in mechanisms would be accentuated when the Fed provides extended guidance regarding policy rates. So, I would answer a resounding "yes" to Dr. Furth's question about zero dollars diverted from investment. Does that answer your question? (I feel like the undergrad course has not ended!).
I do hope Dr. Furth learns about New Keynesian models, just like I learned RBCs.
Posted by: Menzie Chinn at December 18, 2012 06:35 PM
Rick Stryker: Didja really read the Diamond study? Diamond clearly states that he assumes revenue neutrality, but that was not in the Ryan plan. In fact Ryan assumes a certain path for revenues, without saying how that path will be achieved (which is why the CBO analysis did not "score" the plan). The Ryan plan was truly the (first) "return of the magic asterisk".
Posted by: Menzie Chinn at December 18, 2012 06:57 PM
Yes, I did read the Diamond study. I already acknowledged that Diamond's paper was trying to do something "similar" and I was using it to get a sense of the magnitudes. But we really don't need Diamond's or Mankiw and Weinzriel to see the point: 2.7% real growth vs. 2.5%? 11K more jobs per month (with 150k for labor force growth, that's 7%?) Federal personal tax receipts less than 5% higher in a year and converging to something like 2% higher? Those seem like modest claims to me.
Posted by: Rick Stryker at December 18, 2012 07:21 PM
Since he brought up the LIBOR issue, Steven Kopits might be interested in reading the actual FSA notice describing the actions of UBS.
It turns out that UBS was not just trying to lower LIBOR to in order to conceal their financial condition. On other occasions they tried to raise LIBOR, whichever way they stood to make the most money on their derivative bets.
Not only did they manipulate their own bids, they actively bribed participants at other banks to do the same to assist them.
Along with the HSBC money laundering of drug cartels and terrorists, robo-signing, municipal bond price fixing, and on and on, it illustrates that the entire financial sector is a criminal enterprise. If they are too big to jail, they are simply too big and must be broken up.
Posted by: Joseph at December 19, 2012 10:28 AM
Menzie: Zero crowding out? You can't be serious? Perhaps it is you who should re-visit new keynesian models. A quick review of, say Smets-Wouters (2007), will reveal to you significant crowding out effects. But I'll give you the benefit of the doubt and assume you did not just completely misunderstand mainstream new keynesian models and move on.
More importantly, all your responses are beside the point. As I understand Furth's criticism, it’s that you model G as only using idle resources. Surely this cannot be the case. To respond to this point with additional indirect dynamics on the behavior of I just misses the main point and you accomplish nothing. You probably feel like the undergrad class never ends because you insist on treating everyone like a child.
Posted by: Jeff at December 19, 2012 12:22 PM
Jeff: I didn't know Smets-Wouter was gospel. In any case, you will recall they estimation assumed a Taylor rule; have we been following a Taylor rule over the past four years?
Further note Cogan, Cwik, Taylor and Wieland assumed slightly less than two years of the policy rate at zero. Gee. How many years has the Fed funds rate been at zero?
Returning to the adoration you heap upon Smets-Wouter, I will merely note that other DSGE's do indicate different results, e.g., Figure 3 of this survey. I assume that the Fed's Sigma counts as something generated by reasonable people. Tell me if you don't, and I'll pass it on to my friends at the Fed.
Posted by: Menzie Chinn at December 19, 2012 05:14 PM
Methinks that the people who think that money lent to the government (through purchases of Treasury securities) is tied up and unavailable to fund consumption or investment are somehow unfamiliar with repo or the rest of the credit markets.
Posted by: Samuel Conner at December 19, 2012 05:19 PM
To really have a market rate of infinity, you would have to have a trade executed at that price, not something we need worry about ever occurring.
If there are no offers at all, then there is no market, a condition which current fair value accounting rules already provide alternatives for.
Posted by: acerimusdux at February 1, 2013 09:29 AM