Warming Up for April Fools‘ Day: Hoisted from Matthew Yglesias’s Archives: Niall Ferguson Debates Himself

Matthew Yglesias: Niall Ferguson Debates Himself: "I’ve been known to remark on the conservative movement’s strong adherence to Keynesian arguments...

...as a justification for tax cuts in the wake of the mild 2001 recession, adherence that seems puzzling in light of their contrary rhetoric in the wake of the cataclysmic 2008-2009 downturn. Brad DeLong observes that one particularly hilarious example of this is historian-turned-pundit Niall Ferguson who wrote a December 12, 2003 article on the Bush administration that’s in considerable conflict with his contemporary take on things. DeLong requests a Ferguson v Ferguson debate, and with assistance from Ryan McNeely I’m prepared to unveil one.

2003 Ferguson is in boldface, 2010 Ferguson is in italics:

Guns or butter: this is the choice historians conventionally say that governments face. The administration is currently engaged in an audacious — some would say reckless — experiment to disprove this theory. To judge by his actions, the President’s response to the question ‘Guns or butter?’ is: ‘Thanks, I’ll take both.’ This, in short, is the guns and butter presidency. Are there precedents for such a combination? What’s to say this deficit-spending won’t work? Keynes would tell us that in the current environment we must boost aggregate demand.

Certainly. Long before Keynes was even born, weak governments in countries from Argentina to Venezuela used to experiment with large peace-time deficits to see if there were ways of avoiding hard choices. The experiments invariably ended in one of two ways. Either the foreign lenders got fleeced through default, or the domestic lenders got fleeced through inflation.

But the United States has broken the guns or butter rule before. Under President Ronald Reagan, substantial increases in military spending coincided with comparable increases, relative to gross domestic product, in personal consumption — that proportion of G.D.P. that the public, as opposed to the government, spends. The crucial point, of course, is that in the short term at least, fiscal policy is not a zero-sum game.

But this doesn’t respond to long run inflationary fears. When economies were growing sluggishly, that could be slow in coming. But there invariably came a point when money creation by the central bank triggered an upsurge in inflationary expectations.

But, as Keynes remarked, in the long run we are all dead! Aren’t these ‘inflationary expectations’ priced into the markets?

New York Times columnist Paul Krugman, who likens confidence to an imaginary ‘fairy’ have failed to learn from decades of economic research on expectations. All it takes is one piece of bad news – a credit rating downgrade, for example – to trigger a sell-off.

But this will not be the kind of inflation experienced in the 1970’s and 1980’s. So powerful are the deflationary forces today (notably in the second and third biggest economies, Japan and Germany) that Washington can splurge on its military and social services with only a modest impact on expectations of inflation.

But it is not just inflation that bond investors fear. Foreign holders of US debt – and they account for 47 per cent of the federal debt in public hands – worry about some kind of future default.

But the United States has a unique advantage over all other sovereign borrowers: central banks and other institutions around the world need to hold dollars as the currency most frequently used in international transactions. While this is true, America can count on selling large amounts of dollar assets, like 10-year Treasury bonds, to foreigners — very large amounts.

But for how long? The evidence is very clear from surveys on both sides of the Atlantic. People are nervous of world war-sized deficits when there isn’t a war to justify them. According to a recent poll published in the FT, 45 per cent of Americans ‘think it likely that their government will be unable to meet its financial commitments within 10 years’. Surveys of business and consumer confidence paint a similar picture of mounting anxiety.

The only imminent danger is that the dollar could slide sharply against Asian currencies, as it has against the euro. But the chief losers then would be the Asians. And those who panicked about the debt under President Reagan failed to see how manageable it was. It’s even more manageable today.

Hogwash. It was said of the Bourbons that they forgot nothing and learned nothing. The same could easily be said of some of today’s latter-day Keynesians!


The Spiral of Inequality

Interesting to go back nearly 20 years and ask how much things have changed (or not). This is Paul Krugman at the end of 1996:

The Spiral of Inequality, by Paul Krugman,  November/December 1996 Issue, Mother Jones: Ever since the election of Ronald Reagan, right-wing radicals have insisted that they started a revolution in America. They are half right. If by a revolution we mean a change in politics, economics, and society that is so large as to transform the character of the nation, then there is indeed a revolution in progress. The radical right did not make this revolution, although it has done its best to help it along. If anything, we might say that the revolution created the new right. But whatever the cause, it has become urgent that we appreciate the depth and significance of this new American revolution—and try to stop it before it becomes irreversible.
The consequences of the revolution are obvious in cities across the nation. Since I know the area well, let me take you on a walk down University Avenue in Palo Alto, California. ...
You can confirm what your eyes see, in Palo Alto or in any American community, with dozens of statistics. The most straightforward are those on income shares supplied by the Bureau of the Census, whose statistics are among the most rigorously apolitical. In 1970, according to the bureau, the bottom 20 percent of US families received only 5.4 percent of the income, while the top 5 percent received 15.6 percent. By 1994, the bottom fifth had only 4.2 percent, while the top 5 percent had increased its share to 20.1 percent. That means that in 1994, the average income among the top 5 percent of families was more than 19 times that of the bottom 20 percent of families. In 1970, it had been only about 11.5 times as much. (Incidentally, while the change in distribution is most visible at the top and bottom, families in the middle have also lost: The income share of the middle 20 percent of families has fallen from 17.6 to 15.7 percent.) These are not abstract numbers. They are the statistical signature of a seismic shift in the character of our society.
The American notion of what constitutes the middle class has always been a bit strange, because both people who are quite poor and those who are objectively way up the scale tend to think of themselves as being in the middle. But if calling America a middle-class nation means anything, it means that we are a society in which most people live more or less the same kind of life.
In 1970 we were that kind of society. Today we are not, and we become less like one with each passing year. As politicians compete over who really stands for middle-class values, what the public should be asking them is, What middle class? How can we have common "middle-class" values if whole segments of society live in vastly different economic universes?
If this election was really about what the candidates claim, it would be devoted to two questions: Why has America ceased to be a middle-class nation? And, more important, what can be done to make it a middle-class nation again? ...
The Sources of Inequality...
Values, Power, and Wages ...
The Decline of Labor ...
Strategies for the Future ...

Here's a link to the article.

bradford-delong.com 2016-03-31 20:28:45

Live from La Farine: Jack Kemp: "Broaden the [electoral] base...":

If you are going to broaden the base of the Republican Party, you’ve got to realize that millions of Americans look to government as a lifeline.

I have never felt personally that the idea of beating up on government was good politics. It’s true that that government is best which governs least. But it’s equally true that government is best which does the most for people and you need a balance between what government does for people and what people should be able to do for themselves.

Source: Robert Shogan, “GOP Seeks to Consolidate Gains, Build Party Loyalty,” Los Angeles Times (June 2, 1985): p. 12 (attached).

bradford-delong.com 2016-03-31 20:06:30

Must-Read: Whenever I look at a graph like this, I think: "Doesn't this graph tell me that the last two years were the wrong time to give up sniffing glue the zero interest-rate policy"? Anyone? Anyone? Bueller?

Graph 3 Month Treasury Bill Secondary Market Rate FRED St Louis Fed

And Narayana Kocherlakota agrees, and makes the case:

Narayana Kocherlakota: Information in Inflation Breakevens about Fed Credibility: "The Federal Open Market Committee has been gradually tightening monetary policy since mid-2013...

...Concurrent with the Fed’s actions, five year-five year forward  inflation breakevens have declined by almost a full percentage point since mid-2014.  I’ve been concerned about this decline for some time (as an FOMC member, I dissented from Committee actions in October and December 2014 exactly because of this concern).  In this post, I explain why I see a decline in inflation breakevens as being a very worrisome signal about the FOMC’s credibility (which I define to be investor/public confidence in the Fed’s ability and/or willingness to achieve its mandated objectives over an extended period of time).

First, terminology.   The ten-year breakeven refers to the difference in yields between a standard (nominal) 10-year Treasury and an inflation-protected 10-year Treasury (called TIPS).  Intuitively, this difference in yields is shaped by investors’ beliefs about inflation over the next ten years.  The five-year breakeven is the same thing, except that it’s over five years, rather than 10.  

Then, the five-year five-year forward breakeven is defined to be the difference between the 10-year breakeven and the five-year breakeven.   Intuitively, this difference in yields is shaped by beliefs about inflation over a five year horizon that starts five years from now.   In particular, there is no reason for beliefs about inflation over, say, the next couple years to affect the five-year five-year forward breakeven. 

Conceptually, the five-year five-year forward breakeven can be thought of as the sum of two components:   1. investors’ best forecast about what inflation will average 5 to 10 years from now

  1. the inflation risk premium over a horizon five to ten years from now - that is, the extra yield over that horizon that investors demand for bearing the inflation risk embedded in standard Treasuries.   (There’s also a liquidity-premium component, but movements in this component have not been all that important in the past two years.) 

There is often a lot of discussion about how to divide a given change in breakevens in these two components.  My own assessment is that both components have declined.  But my main point will be a decline in either component is a troubling signal about FOMC credibility.  

It is well-understood why a decline in the first component should be seen as problematic for FOMC credibility.  The FOMC has pledged to deliver 2% inflation over the long run.  If investors see this pledge as credible, their best forecast of inflation over five to ten year horizon should also be 2%.   A decline in the first component of breakevens signals a decline in this form of credibility.  

Let me turn then to the inflation-risk premium (which is generally thought to move around a lot more than inflation forecasts). A decline in the inflation risk premium means that investors are demanding less compensation (in terms of yield) for bearing inflation risk. In other words, they increasingly see standard Treasuries as being a better hedge against macroeconomic risks than TIPs.  

But Treasuries are only a better hedge than TIPs against macroeconomic risk if inflation turns out to be low when economic activity turns out to be low.  This observation is why a decline in the inflation risk premium has information about FOMC credibility.  The decline reflects investors’ assigning increasing probability to a scenario in which inflation is low over an extended period at the same time that employment is low - that is, increasing probability to a scenario in which both employment and prices are too low relative to the FOMC’s goals. 

Should we see such a change in investor beliefs since mid-2014 as being ‘crazy’ or ‘irrational’? The FOMC is continuing to tighten monetary policy in the face of marked disinflationary pressures, including those from commodity price declines.  Through these actions, the Committee is communicating an aversion to the use of its primary monetary policy tools: extraordinarily low interest rates and large assetholdings. Isn’t it natural, given this communication, that investors would increasingly put weight on the possibility of an extended period in which prices and employment are too low relative to the FOMC’s goals?

To sum up: we’ve seen a marked decline in the five year-five year forward inflation breakevens since mid-2014.  This decline is likely attributable to a simultaneous fall in investors’ forecasts of future inflation and to a fall in the inflation risk premium.   My main point is that both of these changes suggest that there has been a decline in the FOMC’s credibility.   

To be clear: as I well know, in the world of policymaking, no signal comes without noise.  But the risks for monetary policymakers associated with a slippage in the inflation anchor are considerable.   Given these risks, I do believe that it would be wise for the Committee to be responsive to the ongoing decline in inflation breakevens by reversing course on its current tightening path.


1 2 3 133