Think Tank or Narrative Tank?

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The WSJ blog reports,

The Brookings Institution is bringing a new player into Washington’s think tank arena, launching a center to study fiscal and monetary policy that will be led by The Wall Street Journal’s David Wessel.

In recent weeks, I have been struck by how firm the Insiders have become about their narrative of the financial crisis:

–it was caused by markets run amok
–the economy was saved by bailouts and stimulus
–the public does not appreciate the good that the interventions achieved
–in fact, it turns out that the “secular stagnation” is so stubborn that we need even more interventions

I am not saying that this narrative is necessarily wrong. I just don’t like the sense that I get that the Insiders are determined to bully us into suppressing any doubts.

I hope that this is truly a think tank, and not a narrative tank. But it looks pretty Insiderish to me.

Does QE Steal from Savers?

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This issue seems to come up a lot. For example, Timothy Taylor writes,

Of course, lower interest rates help borrowers pay less, while those who are receiving interest payments get less. Thus, the big winner from ultra-low interest rates is the U.S. government, which over the 2007-2012 period could owe $900 billion less in interest payments. Indeed, the McKinsey report also notes that central banks like the Federal Reserve have been buying assets as part of the “quantitative easing” policies in recent years, and funds earned by the Fed over and above operating expenses go to the U.S. Treasury. They estimate that the quantitative easing policies gained the U.S. government another $145 billion or so during this time period. So overall, the ultra-low interest rate policies have been worth about $1 trillion to the U.S. government.

At this point, I think I prefer to think in terms of consolidating the government balance sheet. The Treasury issues long-term debt, and the Fed buys some of this long-term debt with short-term instruments (such as interest-bearing reserves). You could get the same result without QE–just have the Treasury not issue long-term debt and issue short-term debt instead (or even buy back some of its outstanding long-term debt while issuing more short-term debt).

From that perspective, what QE does is change the mix of outstanding government debt so that more of the debt is short-term and less of the debt is long-term. I do not see that as taking money away from savers and giving a profit to the Treasury. To a first approximation, it is simply a fair swap of equal-value assets.

Suppose that expected returns are equalized across maturity structures. In that case, over the next 20 years, the government’s interest costs will be the same regardless of whether it issues a 20-year bond or instead issues one-month bills and rolls them over for 240 months.

Any saver who thinks that the short-term rate is being held down artificially is welcome to buy long-term bonds instead. You will find some right-wingers outraged over what the Fed is doing to savers. I have no plans to join that chorus.

Brad DeLong on Stagnation

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A lengthy, interesting essay. A brief quote:

In the future we are going to want to spend a greater share of our incomes and attention in areas where the market system works less well: information goods, public goods, increasing-returns goods, pensions, health care, education. The market works less well in these areas. But our alternative modes of collective organization, product [sic?] take some bureaucracy, not exactly cover themselves with glory in these areas either. Thus I suspect that not innovation exhaustion but rather institution design will be our big problem in keeping the pace of true economic growth going into the long-run future.

This is where I use my line: “Markets fail. Use markets.”

That is, I do not think that replacing markets where competition works imperfectly with technocrats shielded from competition entirely is the way to go. So while Brad and I might agree that institutional arrangements matter, we disagree on which institutional arrangements are likely to be most promising. I wish we could arrange it so that he lives in his technocratic utopia while I live in a messier decentralized system without having to create an impermeable boundary between us.

But do not let that deter you from reading Brad’s entire essay. One thing that he does well, compared to other discussions I find in the blogosphere and in the press, is wrestle with the meaning of “stagnation.” Too often, I see demand-side stagnation lumped in with supply-side stagnation, even though to me it seems that they are mutually exclusive. You cannot have both excess supply and excess demand at the same time in the aggregate (you can certainly have excess supply in one market and excess demand in another, but that is not what the sloppy thinkers are describing). Of course, I am willing to forget about demand-side issues altogether and just look at everything in terms of PSST.

As Brad also points out, you need to clarify which problems you think are temporary and which problems are embedded in long-term trends. My own view is that the decline in the value of unskilled (and some skilled) labor is embedded in a long-term trend. If there a lot of low GDP-per-worker folks out there, one has to ask whether the best use of their time is working (I think Brad hints at this issue, but perhaps he means something different).

This brings us down to the issue of whether pure innovation is going to be a favorable long-term trend going forward. I am optimistic, but I go back and forth between being more optimistic about information technology vs. biotechnology. I think that improvements in information technology and its applications are easier to achieve but less dramatic. Human biology strikes me as really complex (and perhaps more complex than many researchers were expecting 20 years ago), but the potential payoffs from biotech strike me as huge. For example, I expect chemicals to do much more to improve cognitive ability than any educational tools.

Are $20 Bills Getting Picked Up?

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Don Peck writes,

I spoke with managers at a lot of companies who are using advanced analytics to reevaluate and reshape their hiring, and nearly all of them told me that their research is leading them toward pools of candidates who didn’t attend college—for tech jobs, for high-end sales positions, for some managerial roles. In some limited cases, this is because their analytics revealed no benefit whatsoever to hiring people with college degrees; in other cases, and more often, it’s because they revealed signals that function far better than college history, and that allow companies to confidently hire workers with pedigrees not typically considered impressive or even desirable. Neil Rae, an executive at Transcom, told me that in looking to fill technical-support positions, his company is shifting its focus from college graduates to “kids living in their parents’ basement”—by which he meant smart young people who, for whatever reason, didn’t finish college but nevertheless taught themselves a lot about information technology. Laszlo Bock told me that Google, too, is hiring a growing number of nongraduates. Many of the people I talked with reported that when it comes to high-paying and fast-track jobs, they’re reducing their preference for Ivy Leaguers and graduates of other highly selective schools.

The article is about data-driven personnel practices. It reads like something out of Average is Over.

Dean Baker on Housing Finance Policy

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He writes,

Way back in the last decade we had a huge housing bubble which was propelled in large part by junk loans that were packaged into mortgage backed securities (MBS) by Wall Street investment banks and sold all around the world. Unfortunately few people in policy positions are old enough to remember back to the this era, which is why they are now in the process of altering rules so that investment banks will be able to put almost any loan into a MBS without retaining a stake.

Pointer from Mark Thoma.

I have argued that the general trend of housing policy is to give Wall Street and the housing lobby, particularly the Mortgage Bankers Association, exactly what they want. Baker is one of the few economists on the left who is willing to speak up on this. When I suggested to an audience of conservatives that we needed to engage Brookings and the Urban Institute to study the effects of housing finance subsidies, people came up to me afterwards to say that they thought that those think tanks would not want to offend important donors.

Janet Yellen in 2009

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In a comment on this post, Mark Thoma pointed out that Janet Yellen’s views have changed since 2005. In this piece from 2009, she says

the hand we have been dealt today doesn’t look anything like the textbook ideal that I just described. Instead, we are experiencing pervasive financial market failures with devastating macroeconomic effects. The normal monetary transmission mechanism has been hobbled by dysfunctional money and credit markets. Risk spreads have ballooned on supposedly safe assets like agency debt and mortgage-backed securities (MBS). What does optimal monetary policy look like in this situation? How do we gauge the effectiveness of policy actions, and how can we implement and communicate systematic policy responses under these conditions?

What strikes me is that Yellen’s views in 2005, that I cited in the earlier post, closely reflected the consensus point of view at that time. And the 2009 speech closely reflects the consensus view at that time.

Today, the problem for the 2009 consensus view is that financial markets recovered really well by the Spring of 2009, but the labor market, particularly as measured by the civilian employment/population ratio, has failed to recover. So now, macroeconomists are struggling to explain how a financial crisis five years ago could still be causing high unemployment today. (Of course, Reinhardt and Rogoff warned that the recovery would be slow, but other economists have challenged their view that financial crises produce slow recoveries.) Do we think that the new consensus will be “secular stagnation” and that Janet Yellen will once again join it?

Mark Thoma on Different Macro Models

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He writes,

The New Keynesian model was built to explain a world of moderate fluctuations in GDP. It features temporary price rigidities, and the macroeconomic aggregates in the model are consistent with the optimizing behavior of individual consumers and producers. For certain types of questions – how should policymakers behave to stabilize an economy with mild fluctuations induced by price rigidities – it is the best model to use. Hence it’s popularity during the “Great Moderation” from 1984-2007 when there were no large shocks to the economy…

The IS-LM model, on the other hand, was built in the aftermath of the Great Depression to examine precisely the kinds of questions we faced throughout the Great Recession, issues such as a liquidity trap, the paradox of thrift, and how policymakers should react in such an environment. Why is it surprising that a model built to explain a particular set of questions does better than a model built to explain other things?

Read the whole essay. My guess is that even those who are inclined to be sympathetic to Thoma on this point, myself included, will have a hard time accepting the idea that one should switch models depending on circumstances. Yet I would argue that the evidence is that economists have done exactly that over the past 50 years.

Russ Roberts and Lant Pritchett

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Talking about Pritchett’s new book, which I really liked. Here is an excerpt from the podcast.

I do mention that Clay Christiansen has this idea of disruptive innovation. Which is where you actually moves to something that looks like lower quality but then rebuild a higher quality on top of that. The classic example of course is the PC (personal computer), which in computing terms when it came out in 1980 was a garage hobbyist toy that no serious computer engineer would pay any attention to. And all the firms that ignored the incipient disruptive innovation of the PC got themselves blown away by this, at the time, low-quality alternative. So I do think technology is going to change the way classrooms are managed in ways that are going to look disruptive, in the sense that they may appear to be de-skilling the classroom. But I think that in the long run there will be a disruptive innovation in the developing world that will rapidly accelerate the rate at which they can close on these higher levels of schooling. But when I hinted at this chaos–it’s going to be very chaotic. It’s going to be lots of people doing things that don’t look like finished classrooms, but produce incredible gains, and they are going to reconstitute a new way of doing education.

Keep in mind that I believe in the null hypothesis, which is that no education technique makes a big difference in terms of outcomes. Pritchett’s book actually offers a lot of support for that hypothesis, in that many results that he reports show little or no difference. However, he does offer one example, from Pakistan, in which giving parents “report cards” on school performance puts pressure on schools to improve and leads to some significant gains in the context of a controlled experiment.

My Review of Phelps

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Is now available. A brief excerpt:

Corporatism satisfies a desire for security. People want security of consumption, security of jobs, and security of their economic status. Corporatism replaces the decentralized competition of the market with political control over the economy. The forms of protection people obtain include occupational license restrictions, labor unions, and entitlement programs.