Turning Japanese

Said Krugman: "It boggles me how
Any long-term concerns may allow
Our political corps
To mostly ignore
The depression we're living in now."

Ev'ryone calls for a plan
On inflation, which isn't at han'.
If we tighten too soon,
We won't be immune
To a Lost Decade à la Japan."

Economists' Golden Rule

The moral economist tries
A society so to devise
That there he would live in
In any case, given
No clue what his role would comprise.

The preceding verse sums up what Nobel laureate Paul Krugman has articulated as the "social vision" guiding his work. Prof. Krugman, of Princeton University, joined fellow Nobel laureate and Columbia professor Joseph Stiglitz Tuesday evening at New York's Fashion Institute of Technology for a wide-ranging conversation before a sold-out audience. The event was co-sponsored by the Institute for New Economic Thinking, whose executive director Robert Johnson moderated the conversation. A video of the entire talk along with Q&A is embedded below.

At 1:27:10 of the video, an earnest interrogator notes that classical economics has come under attack for a lack of moral vision, and asks if the two professors can articulate the moral code that underpins their work. Prof. Krugman, after an initially stunned reaction, responds that he follows the philosophy of John Rawls, who said in his Theory of Justice that social issues should be decided as if from behind a "veil of ignorance," where "no one knows his place in society, his class position or social status; nor does he know his fortune in the distribution of natural assets and abilities, his intelligence and strength, and the like." In other words, self-interest should be replaced by fairness and impartiality.

It would be neither just nor fair if I failed to thank my friend Sherry Brabham, FIT's Treasurer and head of Finance & Administration, whose guest I was for the evening.

Watch live streaming video from instituteforneweconomicthinking at livestream.com

Tale of the Taylor Rule

There's a model of rate calculation,
First advanced in the Great Moderation,
That would have the Fed set
The cost of our debt
Based on output as well as inflation.

Then one of those Keynsian guys
Came and asked: "Do you think it is wise
To posit, post-crisis,
The worst is that prices
May lag, as the model implies?"

"A recession of untold ferocity
And slow monetary velocity
Demand a new means
To grease the machines,
And yours lacks the needed viscosity."

The Taylor Rule is one of those economic concepts of which I often hear mention, but on which I rarely focus. Created by Stanford professor John Taylor and others in the early '90s, the Rule would have the Federal Reserve raise (or lower) the base interest rate by about 1.5 percentage points for every one-percentage-point change in inflation. A 1% point change in GDP would call for a 0.5% point change in rates. (For those who appreciate the beauty of algebra, the Taylor equation below is explained in the link above.) Depending on which economist you talk to, Prof. Taylor has given us either a useful rule of thumb, or an article of faith.

This weekend, I was absorbed by a blog post from University of Oregon professor Mark Thoma, which questions adherence to the Taylor Rule orthodoxy in these days of deleveraging-driven Great Recession. In the Economist's View, Prof. Thoma and others argue that it's silly to hold the Fed to a rule that assumes no economic frictions except for "mild price stickiness." Evidently, the Taylor Rule would have the Fed setting rates much higher than zero, but even future Nobel Prize winners should know that unquestioning adherence to a model may have adverse real-world consequences.

Krugman Examines the Ryan Plan

That dapper young Congressman Ryan
Was sellin' what many were buyin'.
A wonk came along,
Announced he was wrong,
And proved it without even tryin'.

"My plan," said the Chair of the Budget,
"Will balance the books, as I judge it."
Said Krugman: "Your cuts
Are unspecified, but
Any figure looks fine if you fudge it."

"To cite what I find so offending
In the plan that the Chairman's intending,
Have a look at the dents
That he'd make in Defense
And in Other Discretion'ry Spending."

"They'll cut, say the Chair and his staff,
From 12 points to 3 1/2.
Since the Pentagon's spent -
On its own - 4%,
This projection is good for a laugh."

"If you doubt this Princetonian nerd,
Let the CBO have the last word:
'The specifications
For these calculations -
At this point - have yet to be heard.'"

Paul Krugman, in his New York Times blog, asked What's In The Ryan Plan and determined: not much. His dismissive critique of House Budget Committee Chairman Paul Ryan's US federal budget proposal is based on the analysis of the Congressional Budget Office, which found that the plan's headline numbers were unsupported by specific proposals to achieve them.

Flat As All That

"The median wage compensation,"
Said Krugman, "Has lain in stagnation."
For those who mistrusted,
His charts are adjusted
For medical plans and vacation.

Paul Krugman takes umbrage at those who doubt his assertion that US wages have stagnated since the 1970's (see chart). Yes, Dr. Krugman has thought this through, and the stagnation even takes the cost of health benefits into account, as detailed in this analysis from the Economic Policy Institute. Alarmingly, during the generation-and-a-half in which wages have barely risen, household debt has skyrocketed from 45% of GDP to nearly 100%, culminating in the mortgage meltdown. (Recovery alert: it has since moderated to about 85% of GDP.) The bottom line politically is that this plays into the Presidential choice in November. Mitt Romney has profited greatly from some of the policies and developments that led to the middle class stagnation, and defends them robustly on the campaign trail. Barack Obama, to be fair, does not represent the dramatic reversal of such policies that either he or his critics would have you believe, but he at least acknowledges the problem and proposes some ameliorative steps.

Less Than Zero

The economy's got so abominable
That constraints on the Fed are phenomenal,
But the will to inflate
Makes a negative rate
Seem potentially real, if not nominal.

Thanks to Marketplace radio, it has come to my attention that members of the general public are still concerned about the Fed's inability to drop interest rates below zero. Because of the so-called "zero lower bound" problem, it may seem that the Fed has run out of monetary tools to stimulate the economy. In terms of nominal interest rates, this is correct. That's why, according to Marketplace Money economics editor Chris Farrell, it may be time for the Fed to "get real":

The Fed can create a negative "real rate" under certain conditions. Two quick definitions: "Real" means adjusted for inflation and "nominal" means the stated rate. So if the fed funds rate is at zero (nominal) and inflation is running at 2.5 percent, the real rate (inflation-adjusted) is below zero. In other words, if the Fed's nominal rate is at 0 percent and the inflation rate is 2.5 percent, then the real rate of interest is -2.5 percent. The Fed could lower the real rate of interest by pushing for a higher rate of inflation -- say, 3 percent (for a -3 percent real rate). Among others, it's an approach that New York Times columnist and Nobel laureate Paul Krugman has written about favorably.

Bernanke - Assimilated by the Borg?

"My fellow Princetonian, Ben,"
Said Krugman, "A man of great ken,
Said to signal, in crisis,
Inflation of prices,
Would get people spending again."

"But his Fed, in my own objectivity,
Has shown unexpected passivity
To use every tool
That he spoke of in school
To boost economic activity."

"To fight unemployment so brutal,
One should use the whole kit and caboodle,
But the Fed, in its thrall,
Assimilates all,
Against which, resistance is futile."

In a scathing critique entitled "Earth to Ben Bernanke", New York Times columnist and Princeton professor Paul Krugman took the Fed chairman to task for seemingly forsaking the advice that he gave to Japan's central bankers twelve years ago. Then-Professor Bernanke lectured the Japanese on their "Self-Induced Paralysis"; were they to face the "liquidity trap" of a stagnating economy and zero interest rates with sufficient boldness, wrote Bernanke, the Bank of Japan would signal a higher inflation target of, say, 4%. This would likely induce folks to take their yen out of their futons and spend them. A similar lesson would apply to today's Fed, says Krugman, but Chairman Bernanke has not followed the advice of Professor Bernanke. Has Bernanke been cowed by anti-inflation political bullying, he asks, or "assimilated by the Fed Borg and turned into a conventional central banker?"

Good Employment Numbers, But…

"A DC elite that obstructs
More stimulus misses the crux
That, despite fewer jobless,"
Said Krugman, "It's obvious
The US economy sucks."

The Giants won the Super Bowl and last Friday's employment report shows the most jobs created since the 2008 crash, so everything's fine, right? Not so fast, says Paul Krugman. Although "for once, falling unemployment was the real thing, reflecting growing availability of jobs rather than workers dropping out of the labor force," any recovery cannot be self-sustaining while we have "a sharp fall in household formation — econospeak for lots of young adults living with their parents because they can’t afford to move out." This is one of the chief impediments to a housing recovery. Unfortunately, Krugman maintains, many in the economic elite are quick to call for austerity at the first sign of positive news, and seem to direct their vigilance against an inflation that has failed to materialize for the last three years. So, a little good news could become bad news if it leads to more such economically retrograde behavior.

None of this, however, should spoil the Giants' victory celebration - congratulations to Coach Tom Coughlin, Eli Manning & company!

Liquidity Trap: Mankiw v Krugman

Said Mankiw: "I've made a regression
Of the Fed funds rate setting progression,
Which suggests we may snap
Our liquidity trap,
Or at least, that's the graphic impression."

Said Krugman, with Nobel derision:
"Your regression requires revision;
This tract on the Trap
I have shown to be crap,
When corrected with Keynsian precision."

Economic heavyweights Paul Krugman and Greg Mankiw recently debated whether the United States is exiting the "liquidity trap," an impossible state of affairs in which the Fed would have to drop rates below zero to set the right balance in its fight against inflation and unemployment. Some years ago, Mankiw had analyzed the Fed's interest rate actions and determined that they approximated a simple formula: FF = 8.5% + 1.4 (I - U), where FF is the Fed funds target rate, I is inflation (core CPI) and U is the unemployment rate. In other words, if the rates of inflation and unemployment are equal, then the Fed would set rates at 8.5%. For every percentage point by which unemployment exceeded inflation, the Fed funds rate would decline by 1.4%. If unemployment is high and inflation is low, as is currently the case, the Fed funds rate would logically be negative, but this is not possible; hence, the liquidity trap.

Professor Mankiw notes hopefully that an application of his formula to the recent CPI and jobless rates suggests that the theoretical Fed funds rate is heading upward and will soon break through zero (see graph), thus signalling an end to the liquidity trap. Enter Professor Paul Krugman, pouring cold water on the hopeful graph. First, he notes that the formula is based on actions that the Fed took in the '90s, which are not necessarily those that they should take today, in a different economy. Second, he notes that a recalibrated formula, based on Fed actions of the '00s, suggests that the US is still deeply within the liqudity trap (although headed upward). More stimulus, anyone?

Procreationism

A Republican hopeful's profundity
Surprised the political punditry,
When he said he expects
His constituents' sex
To flower in fruits of fecundity.

In his New York Times blog this week, Paul Krugman took time out from his spat with Tyler Cowen to remind everybody that former senator Rick Santorum (pictured) opposes contraception and would defund any federal support for it if elected President. In an electoral season in which Republicans compete to show the courage of their conservative convictions, Santorum stands out for his public commitment to old-fashioned sexual propriety, and his refusal to distinguish between private morals and public policy.

Not Working

Said Krugman, with skeptical wince:
"Employment just doesn't convince;
Though it tumbled off greatly
In 2008, we
Have seen no recovery since."

As a guest on the Charlie Rose program last week, Princeton's Nobel Prize-winning economist Paul Krugman poured cold water on the notion that the recovery is slowing, inasmuch as he does not believe there has been a recovery at all. Despite improvements in the official unemployment rate, notes Dr. Krugman, the percentage of adults actually employed has not increased. This apparent contradiction is explained by the "discouraged job seeker" effect, in which those who stop actively looking for work are no longer counted as unemployed.

* * *

A new page has been added to Limericks Économiques: "Dr. Goose and Mad Kane."  Please visit this page for the best in Dr. Goose's contributions to "Mad Kane's Limerick-Offs;" blogger Madeleine Begun Kane supplies the opening line, and verse-writing hopefuls compete to see who can best complete it. Warning: some of the verses are a little spicy (if not too raw).

Fightin' Words

A woman who loved a good fight
Would demand, as she argued all night,
Philosophical heft
From those on the left
And empirical proof from the right.

A recent walk through the economic blogosphere left the impression that liberals (of the progressive variety, as in this randomly selected post by Paul Krugman) like to base their arguments on data, history and "whatever works;" while conservatives (particularly of the supply side or libertarian variety) seem to prefer philosophy, game theory, analogies or even the US constitution - anything but empirical studies.

Happy Thanksgiving

Said Krugman, "As often discussed,  
Our economy's prostrate and trussed;  
Let's stuff it with pork  
And test with a fork  
When it's done to a succulent crust."   

On this most American of holidays, Dr. Goose gives thanks to that small but vocal band of Anglophones from around the world who appreciate the economy in verse.

Le Cri de Krugman

Dr. Krugman inveighed with ferocity:
"Without spending, the decade is lost," said he;
"With consumers defeated,
The Treasury's needed
To boost monetary velocity."

Keynsian Lament

Said Krugman, full of reproach,
"The White House must change its approach.
If the engine needs gas
We should do it first class,
But they leave us to languish in coach."

Keynesian Smackdown

Said Paul Krugman: "Bernanke, you wannabe -  

There's a hundred of you, and just one o' me;  

Now you've set rates so low  

That we've nowhere to go  

But to try to reflate the economy."

Bring Back the WPA

Paul Krugman, scratching his chin,

Says: "Let's give Federal hiring a spin.

With a weak private sector

Ill-equipped to correct 'er,

Unemployment is bound to set in."