The Pedagogical Implications of Mr. Trump

He’s made a lot more work for me over the past two years — re-arranging and updating lecture slides. One thing is moving up and emphasizing what a recession is (a 20 year old student doesn’t remember the last one, really), and what current indicators are flashing. (You can imagine what it’s done for my international trade class!)

Here’s some cautionary notes on defining a recession (caution: log scales)

Here are some notes on prediction (caution: probit, Normal distribution!)

Here’s the first midterm the undergrads just took.

 

68 thoughts on “The Pedagogical Implications of Mr. Trump

  1. pgl

    ““The data are pretty clear that we are not in a recession.”
    ‐‐ White House Council of Economic Advisers Chairman Ed Lazear, Wall Street Journal, May 8, 2008

    Did Fast Eddie his number are insane (hat tip to Max Sawicky) says this on May 8, 2008? We were not in a recession then. OK BEA shows output grew by only 0.9% in 2007QI (annualized basisi) but for the rest of the year, it grew by over 2%.

    Now anyone who said that a year later (Donald Luskin was saying that as of Sept. 2008) could be rightly laughed at.

    Yea – financial markets were having their issues early on in 2007 and the housing market was showing problems but not the overall economy.

    Reply
  2. PeakTrader

    ARRA failed to close the output gap, because the spending multiplier was less than unity, i.e. a $1 increase in government spending resulted in less than $1 in additional output.

    A bold middle class tax cut or $5,000 per worker ($700 billion for the 140 million workers at the time) with a boost in unemployment benefits (rather than extensions) would’ve filled the output gap quickly – raising demand to meet idle and existing supply.

    There was tremendous waste in government spending. However, each worker would’ve used the tax cut the best way they saw fit. Some would’ve caught up on mortgage payments or rent, some would’ve paid off a car loan or credit cards, some would’ve made purchases, etc..

    Discretionary monthly income would’ve increased immediately strengthening household balance sheets, along with strengthening the banking system, to allow the spending to go on. More government spending and squandering would’ve resulted mostly in even bigger budget deficits.

    Reply
        1. 2slugbaits

          PeakTrader See Solyndra, to start.

          How does that reduce the multiplier to less than 1.00? I don’t see a Solyndra variable in any of Menzie’s charts.

          BTW, do you believe the government should only fund zero risk projects? If so, then why should the private sector ever fund a non-zero risk project given that the government’s carrying capacity for risk is greater than any private sector entity?

          Reply
          1. pgl

            The loan program Solyndra used was created under the Energy Policy Act of 2005 not ARRA. I guess PeakStupidity does not know this either. Of course he only “knows” what KellyAnne Conway lets him know.

      1. pgl

        Sez V. Putin – Peaky’s boss. Of course ARRA did fail. It partially offset the damage from the Great Recession which began in Dec. 2007. But as Christina Romer recommended it should have had more bang for the back (more spending increases and less Republican driven tax cuts) and it should have been larger. But we had the power of the McConnell filibuster which watered down her recommendations. And of course we had that GOP led 2011 push for fiscal austerity.

        PeakDishonesty should know all of this by now as we have reminded Putin’s favorite bot many times. But Peaky is under strict orders from his boss to deny all reality.

        Reply
          1. pgl

            This is a very well written survey. Too bad PeakLazy will never read it and even if he did would not understand. So let’s make this easy for him by simply citing the conclusion:

            ‘The magnitude of the fiscal multiplier, in theory and in the data, depends on the characteristics of the economy. In some senses this observation is obvious. What is less recognised is that the state of the economy is as, or more, important than many other aspects that have been the focus of analysis. The most critical aspects include the degree of slack in the economy, the state of the financial system, and the conduct of monetary policy.’

          2. PeakTrader

            Menzie Chinn, before WWII, income taxes were too low for the tax multiplier to have much of an effect. Middle income workers paid very little in taxes.

            Every recession is different.

            We had a consumption boom in the 2000s. U.S. consumers bought foreign goods (trade deficits reached $800 billion a year or 6% of GDP by the mid-2000s), while foreigners bought U.S. Treasury bonds.

            It would’ve been appropriate for the federal government to “refund” consumers to allow the spending to go on.

        1. pgl

          You had to use the Google machine again to come up with right wing garbage? What happened Peaky – has the DONALD stopped spoon feeding you again?

          Reply
        2. pgl

          Even though this was written by right wing John Taylor, it does contain this:

          ‘Despite the gigantic $862 billion stimulus package, the change in government purchases due to ARRA has been immaterial to the economic recovery: government purchases increased by only 2 percent of the $862 billion package ($18 billion). Infrastructure was even less at $2.4 billion. There has been almost no change in government purchases for the multiplier to multiply.’

          What I and Paul Krugman have said. Hey Peaky – next time READ what you link to. Of course I may be making the mistake that you are capable of reading.

          Reply
        3. 2slugbaits

          PeakTrader Your comment referred to Robert Barro, but your link was to John Taylor. Taylor has a point that some of the ARRA stimulus was deliberately diluted by GOP state governments. They saw the additional federal dollars as an opportunity to decrease state spending. That strikes me as a good reason why Republicans should not be running state governments. Taylor incorrectly said that Romer assumed a multiplier of 1.5. He should go back and read her paper. Romer assumed a phased-in multiplier for government spending that peaked at 1.5, but that 1.5 number didn’t happen immediately. And she assumed a multiplier less than 1.00 for tax cuts, which accounted for half the ARRA. He also said that ARRA was $862B. This is wrong. About 10 percent of the ARRA was a simple extension of existing tax adjustments and therefore did not represent a change to the status quo. We would not expect a multiplier if there is no change. And about $90B of what Taylor counts as ARRA was actually added shortly before he posted his comments in Oct 2010, so we wouldn’t expect any effect from that.
          Taylor also misunderstands what is meant by government purchases. The Commerce data records transactions well after the economic activity itself has occurred. The only thing his chart showed was the lag time between when economic activity actually begins (e.g., negotiating bank loans, hiring workers, ordering materials, arranging transportation, etc.) and when the purchase is recorded, which occurs long after the initial economic activity has occurred. Robert Barro’s work also suffers from a similar problem because he does not understand how the Defense Finance & Accounting System records purchases. A “purchase” in DFAS does not mean what Barro seems to think it means. The “purchase” recorded by DFAS and pulled into NIPA data lags the actual economic activity by many years, depending upon which subfunction account you’re looking at.

          Reply
          1. pgl

            You actually expect PeakStupidity to read his own links? He can’t as that is not part of his Russian bot programming.

      2. Moses Herzog

        Because my higher level math is weak (perennial laziness and bad genes, I prefer to think more of the former) I am often constrained to just using logic to get these answers, instead of the proper/best way of using mathematics (much to my continual shame, no sarcasm). But looking at this paper, could we safely assume that the ARRA multiplier effect was pretty close to 1.5?? Or certainly closer to 1.5 than to 1?? Yes??
        https://voxeu.org/article/measuring-output-responses-fiscal-policy

        I mean, you know me pretty well by now Menzie, any dude with the last name Auerbach, I’m betting he knows what he’s talking about.

        And also, by extension of the same logic, that the donald trump tax cuts for the upper 1%, had a multiplier effect very very near to just 1?? Or is my “dirty liberal” bias muddying up the waters on that one??

        Reply
        1. pgl

          Lord Rick – try to keep up with the conversation. First of all everyone knows Peaky was referring to Robert Barro. But neither you nor Peaky even remotely understand the “logic” behind Barro’s argument here. He is assuming a perfect markets world where we never deviate from full employment.

          But wait! Peaky keeps say we are far below full employment. Yea I know Peaky is incoherent babbling fool who knows nothing about macroeconomics.

          Now anyone who lived through the Great Recession should know by now that Barro’s view of the world is highly suspect. But not THE Rick and PeakStupidity!

          Reply
    1. pgl

      Every time we think you could not write more stupid gibberish, you exceed expectations. It seems your Russian bot programming has increased its disinformation campaign.

      Reply
  3. Moses Herzog

    The first link I clicked on was the third one. I have always been abundantly curious how Menzie tests his students’ mettle. Fascinating. If we can guess that his undergrads test is his easiest test (relative to the other exams he gives) then that might give some of the idiots on this blog some idea of where they are in economic literacy in relation to Menzie’s world (and professor Hamilton’s). They both are on another plane to 99.99999999999% of the commenters here (and I haven’t seen the one in that far off decimal point comment yet). Brad Setser??? MAYBE. A BIG maybe. That’s why it’s a great gift to us all they care to run and maintain this blog, put up with the hassles of this blog (including sometimes editing the vulgarity of the derelict individual writing this comment) and give their thoughts as it is not something required of them and they do it voluntarily out of their own munificence and brotherly magnanimous spirit.

    i.e.—-be grateful…….. b*tch about many a thing—but not the hosts of this blog or the knowledge imparted.

    Reply
    1. pgl

      God – you are off the rails with the babbling today! Another completely irrelevant question. Same old PeakStupidity!

      Reply
    2. 2slugbaits

      PeakTrader
      You said: What about paying people, who can work, not to work? Is that good for output?

      But just a few posts earlier you said this: a boost in unemployment benefits (rather than extensions) would’ve filled the output gap quickly

      Just thought I’d point that out.

      Reply
      1. pgl

        Careful there! If you expect this Russian bot to be consistent, his programming might just explode. And what a mess that would create!

        Reply
  4. Asif Ud Dowla

    Tell us how Mr. Trump has changed your international trade class. Please include a reading list necessitated by Mr. Trump

    Reply
    1. Menzie Chinn Post author

      Asif Ud Dowla: See here. Revisions:

      CRS, Section 232 Investigations: Overview and Issues for Congress
      Department of Commerce Bureau of Industry and Security Section 232 Investigations
      Michael O. Moore, “Steel Protection in the 1980s: The Waning Influence of Big Steel?” The Political Economy of American Trade Policy, Anne O. Krueger, ed. (Chicago, 1996).
      Robert Crandall, “The Effects of U.S. Trade Protection for Autos and Steel,” BPEA 1987.
      Villareal and Ferguson, “NAFTA Renegotiation and Modernization,” CRS Report (February 27, 2018).
      Masters, “Foreign Investment and U.S. National Security,” Council on Foreign Relations (August 2018).
      Jackson, “CFIUS,” CRS Report (July 2018)
      Petri, Plummer, Urata, Zhai, “Going It Alone in the Asia-Pacific: Regional Trade Agreements Without the United States,” WP 17-10 (Peterson IIE: October 2017).

      Reply
  5. Moses Herzog

    Robert Barro is an AEI guy. Need we know any more than that?? That’s possibly the only thing worse than being a FOX news anchor.

    Reply
    1. Menzie Chinn Post author

      Moses Herzog: He’s written some interesting stuff in the past. He has brought up the question whether government bonds are net wealth (aka neo Ricardian equivalance…).

      Reply
      1. Moses Herzog

        I think David Ricardo has to rank as a Top 5 economist EVER, and if others want to take his ideas and run with them, I’m all for it. But if a person believes that this nation’s debt level (or any other nation’s debt level with the possible exception of Germany, even that example is a stretch) effects people’s (or “households”) personal saving/spending habits, I will then wonder if said person is getting their economic data straight from planet Pluto. I mean, honest to God, I’m not trying to be a smart ass here, but I’d love to hear about the country where that is indeed the case.

        Warning: Cliff Clavin Style Babbling Dead Ahead: Chinese save excessively because government spending patterns?? Yes. But not because of absolute government debt levels (bonds or otherwise) but because they don’t want to reach age 65 and live in a cardboard box, with no money to pay for placebo medicines from the local clinic. One of the reasons marriage is such a huge step there is that 3/4 of the older generation with a daughter as their “one child” (3/4 being the mildest estimate) see their future son-in-law as the bulk of their retirement and senior care funding. Don’t ask how I’ve surmised that. In Bizarro World I was mainly worried about having shoes with no scuff marks.

        Anyways, that’s social safety net (where the government debt is being spent or NOT being spent) not the absolute amount of government debt itself.

        Reply
  6. Not Trampis

    Barro is the bloke who had no idea that there was special provision to pay for the Korean war wasn’t he?

    Ricardian equivalence is a theory looking for evidence is it not? Surely if there is no evidence for it in Japan you aint going to find it anywhere

    Reply
  7. Barkley Rosser

    Menzie’s Palgrave en try is pretty definitive (btw, I am currently one of the editors of its next round, so, of course I would say that), but nobody has mentioned an important part of this that PT really should be aware of if he is going to comment on this.

    PT, the size of both the spending and tax multipliers is widely accepted to depend on the state od the economy. If one is at near or even beyond full employment aas in WW II, then Barro’s estimate of near zero is probably correct, and for both the spending and tax multipliers. The deeper one is into a recession or depression with higher and higher unemployment, then the higher is both multiplliers, although pretty much always for any given level of the economy, spending multipliers exceed tax ones for the simple reason that tax ones operate indirectly through induced changes in spending, whereas spending multipliers act directly on spending with the indirect effects added on. A tax multiplier is a purely indirect multiplier, whereas the spending ones have that plus that first round effect, some more basic economics you seem to need to learn, PT.

    Reply
    1. pgl

      “If one is at near or even beyond full employment aas in WW II, then Barro’s estimate of near zero is probably correct, and for both the spending and tax multipliers.”

      Exactly! Now Peaky who keeps saying we are far full employment should never cite Barro on this issue if Peaky remotely understood the basics. But isn’t it clear by now that Peaky is as clueless about macroeconomics as even D. Trump?

      Reply
  8. CoRev

    Menzie, I’m having some trouble getting my hear around this statement of yours: ” One thing is moving up and emphasizing what a recession is (a 20 year old student doesn’t remember the last one, really) …” I would think a 10-11 YO would be cognizant of the upheaval caused by loss of a job or failure to obtain a similar paying one in the last recession.

    Is it perhaps an indicator of the types of students you are seeing or the recession impacts in the state(s) your school serves? Just curious about what you think has changed?

    Reply
    1. Moses Herzog

      @ Co Rev
      You’re lucky I’m not running this blog. I’ve taken a lot of “stuff” off of people on this blog and outside of this blog, a certain % of that negative “stuff” I probably deserved. But as a former teacher (or someone who did his very best to play a facsimile thereof) I gotta tell you CoRev, you go after my students in an attempt to upset me, that would be your last comment uploaded on this blog. Most people on this blog already knew you had no class CoRev, now you’ve given yourself the ZERO class version of a Twitter verification.

      Reply
    2. noneconomist

      Speaking of being cognizant: how about an elementary schoolteacher in Utah who has no clue of the significance of an ash cross on a student’s forehead on Ash Wednesday? (In Utah, mind you) Or, apparently that there were Catholic students who might participate in Ash Wednesday? Or that there is an Ash Wednesday? (In Utah, where 60% of the population is historically connected to 19th century —even current—religious persecution)
      Given that gap in said teacher’s history training, Not unusual that memories in the very young have little connection to events from half a lifetime ago.

      Reply
      1. Moses Herzog

        Don’t get me started on Mormons. Or Catholics for that matter, Everyone has the right to believe what they want. But cults and cult mindset gets both dangerous and mentally unhealthy. I’ll just leave it at that. I’ve always been cynical about these things, and recently reading part of The Book of Enoch isn’t “helping” in the non-cynical dept for me. My Mom attends Methodist and recently they had an ash thing at the church and I was like “WTF??” I was raised Methodist and I don’t ever remember doing that sh*t. WOW. I sometimes wonder who was the stand in actor for some of the scenes in my life.

        Reply
  9. Steven Kopits

    Here’s my two cents worth:

    Depressions are categorically different from recessions. Recessions are income statement events, and therefore amenable to treatment with revenue and expense modifications, eg, a reduction in interest rates.

    By contrast, depressions are balance sheet events, principally related to a loss of homeowner equity value. Since the issue is the compromise of collateral — ie, asset values — depressions are not amenable to mitigation using interest rates. If the collateral is under water, the interest rate is essentially irrelevant, because the borrower has no ability to refinance and no willingness to invest (or even consume very much) until debt is paid down. Thus, an interest-rate focused approach will produce anemic GDP results, which it did.

    If the problem is collateral, then the means to address it is not through the banks (‘helping Wall Street’), but rather direct and unsterilized cash infusions to borrowers (helping ‘Main Street’). The government continues to hand out cash to borrowers (taxpayers, some other definition?) until meaningful inflation is generated, with risk tolerance to the upside. Because of the high propensity to pay down debt and material slack in the economy, this cash will make its way back into the banks, rather than into inflation.

    Barring that, interest rate policy will be ineffective, as demonstrated by the FFR falling to zero and staying there for 7-10 years (only twice has this happened since 1900: the Great Depression and, you guessed it, the Great Recession (the China Depression). FFR at zero is a key market of a depression, by this way of thinking). With the FFR at zero for a prolonged period, the presumption is that real rates are still too high, ie, collateral is compromised. (Hence the whole debate over which Taylor Rule is appropriate.)

    Without assistance on reducing collateral, homeowners have to pay down debt bit by bit over many years, and they will become radicalized in the process because they are working just to make up for prior losses, rather than moving ahead (https://www.kellogg.northwestern.edu/faculty/van-straelen/index.htm#do_not_bookmark). Paying down this debt (or restoring homeowner equity) takes a long time, in the case of the Great Recession, consumer credit falls until Q2 2013. This, for depression cycle dating, we use an asset marker, in this case, consumer credit. Note that peak to trough consumer credit required about seven years. During this time, homeowners will perceive government policy — which is focused on interest rate remedies — as impotent. This discredits the elite and leads to the rise of populism, for homeowners, populist fascism.

    I think, but do not know, that the fascist period actually starts at the trough. That is, we often see populist unrest not when things are really bad, but when they start to get a bit better. For example, dictatorial regimes often collapse when they try to liberalize. Perhaps someone has better insight on this.

    But when does the fascist period end? I would argue that the fascist impulse — the desire to hunker down, to expel strangers and withdraw from international trade and agreements — peaked the day before Steve Bannon was fired, ie, August 2017. I would add that the balance of opinion towards Brexit also swung to ‘stay’ in August 2017. Real home prices reached their previous peak around this time, which should have the effect of ‘de-radicalizing’ homeowners. In this view, median voter theory would again apply at the end of the depressionary period (from Aug. 2017), and we should expect to see moderates winning elections again, which is exactly what we saw in November 2018.

    In any event, the multiplier on unsterilized fiscal injections is, in effect, infinite until the FFR can rise above the floor and inflation reaches some material level, call it 2.5-3.0%.

    Reply
  10. pgl

    More proof that PeakIdiot is a Russian bot:

    “PeakTrader
    March 10, 2019 at 3:03 am
    Menzie Chinn, before WWII, income taxes were too low for the tax multiplier to have much of an effect. Middle income workers paid very little in taxes.

    Every recession is different.

    We had a consumption boom in the 2000s. U.S. consumers bought foreign goods (trade deficits reached $800 billion a year or 6% of GDP by the mid-2000s), while foreigners bought U.S. Treasury bonds.

    It would’ve been appropriate for the federal government to “refund” consumers to allow the spending to go on.

    PeakTrader
    March 10, 2019 at 4:58 am
    I think, Barro concluded a $1 tax increase reduces GDP by $1.10.”

    Just more incoherent babble and totally unresponsive to Menzie’s point. It is like Peaky is a monkey banging on his typewriter with no comprehension of what he is typing.

    Reply
  11. Moses Herzog

    @ Menzie
    Menzie, you know how every once in awhile I like to ask you a question that I view as humorous (in a friendly way to rib you) just to see if you’ll bite, and you in your solid wisdom, no sarcasm, usually glance at and don’t reply?? OK get ready…..

    There is a name I am “surprised” Menzie hasn’t brought up in this debate, Menzie do you know who that is?? [ throws a large M-80 firecracker into the classroom from outside window, then dodges under campus shrubbery grinning ]

    [ For our live studio audience’s edification, this is the part where Professor Chinn is supposed to humor the goofball degenerate commenter by replying curtly “No, who??” ]

    Reply
  12. Zi Zi

    What drives the short term and long term are different.

    Check out TED spread (TEDRATE) and CBOE 10-Year Treasury Note Volatility Futures (VXTYN) on FRED.

    Great Depression brought on Nazi, Great Recession brings the downgrade of everything. The “real” culprits’ heads never roll.

    Reply
  13. PeakTrader

    It’s amazing how ignorant some of the leftists are on this blog. Barro correctly predicted ARRA’s failure. Yet, those leftists ignored its failure and wanted more of the same!

    Barro stated:

    “I estimate a spending multiplier of around 0.4 within the same year and about 0.6 over two years. Thus, if the government spends an extra $300 billion in each of 2009 and 2010, GDP would be higher than otherwise by $120 billion in 2009 and $180 billion in 2010. These results apply for given taxes and, therefore, when spending is deficit-financed, as in 2009 and 2010. Since the multipliers are less than one, the heightened government outlays reduce other parts of GDP such as personal consumer expenditure, private domestic investment and net exports.”

    Public spending can cost much more in private spending.

    Reply
    1. PeakTrader

      Barro put together a five year plan with a $1 tax increase reducing GDP by $1.10:

      “…a “five-year plan” from 2009 to 2013. The path of incremental government outlays over the five years in billions of dollars is +300, +300, 0, 0, 0, which adds up to +600. The path for GDP is +120, +180, +60, minus 330, minus 330, adding up to minus 300. GDP falls overall because the famous “balanced-budget multiplier”—the response of GDP when government spending and taxes rise together—is negative. This result accords with the familiar pattern whereby countries with larger public sectors tend to grow slower over the long term.

      The projected effect on other parts of GDP (consumer expenditure, private investment, net exports) is minus 180, minus 120, +60, minus 330, minus 330, which adds up to minus 900. Thus, viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal.

      The fiscal stimulus package of 2009 was a mistake. It follows that an additional stimulus package in 2010 would be another mistake.“

      Reply
      1. pgl

        No link to this gibberish? How come? Oh yea you do not want us to see the full context. At least CoRev provided a link to Barro so the rest of us could mock the underlying premises. See my reply which is directed at your incoherency. Complaining about an output gap while citing someone as an authority who begins with there is no output gap. PeakyBoo – STUPIDEST MAN ALIVE!

        Reply
        1. CoRev

          Sigh. Another example of PGL’s reading and comprehension abilities: “At least CoRev provided a link to Barro so the rest of us could mock the underlying premises. ”

          Some one who so consistently ridicules should better check his work.

          Reply
          1. pgl

            Oh gee – I did give you too much credit as I confused you with Rick Stryker. Let me correct the record – THE RICK gets credit for providing that link as CoRev as usual provided us with absolutely nothing!

    2. pgl

      “Barro correctly predicted ARRA’s failure. ”

      Either another blatant lie or perhaps the dumbest statement ever written. Tons of evidence that ARRA did assist in the recovery. There were two issues, however. It was not big enough thanks to right wing dolts like you. And again thanks to right wing dolts like you – it faced state level austerity in 2011.

      You write the dumbest things ever and when people point out that you have written lies – you just repeat the same old BS over and over. OK Peaky – you win what DeLong dubs the stupidest man alive!

      Reply
  14. Moses Herzog

    I enjoyed reading this story, and thought some of the regular commenters here on Menzie’s stellar blog might enjoy it as well. Reading this story tastes about like the 3rd Bourbon Rickey you are drinking in the middle of Mormon Utah.
    https://earther.gizmodo.com/bill-nye-turned-up-at-alexandria-ocasio-cortezs-talk-at-1833190763

    This is how a legislator leads, not like some old hag apologizing every 5 minutes for idling in the political middle ground. Not some old hag crying to the media because her sleaze infested and profiteering buddy Joe Crowley got T-boned on the election ballot. You have to “rouse” your political base and bring out their enthusiasm to go to the polls.

    Reply
  15. pgl

    Peaky is reminding us of the insanity written by Robert Barro but Brad DeLong has pulled out this December 2007 forecast from Lawrence Kudlow:

    https://www.nationalreview.com/kudlows-money-politics/bush-boom-continues-larry-kudlow/

    “There is no recession. Despite all the doom and gloom from the economic pessimistas, the resilient U.S economy continues moving ahead “‘quarter after quarter, year after year’” defying dire forecasts and delivering positive growth. In fact, we are about to enter the seventh consecutive year of the Bush boom.”

    I’m sorry Peaky – Kudlow remains the STUPIDEST MAN ALIVE! Peaky needs to try harder.

    Reply
  16. Steven Kopits

    Let’s try it again, with feeling this time.

    *****

    Here’s my two cents worth:

    Depressions are categorically different from recessions. Recessions are income statement events, and therefore amenable to treatment with revenue and expense modifications, eg, a reduction in interest rates.

    By contrast, depressions are balance sheet events, principally related to a loss of homeowner equity value. Since the issue is the compromise of collateral — ie, asset values — depressions are not amenable to mitigation using interest rates. If the collateral is under water, the interest rate is essentially irrelevant, because the borrower has no ability to refinance and no willingness to invest (or even consume very much) until debt is paid down. Thus, an interest-rate focused approach will produce anemic GDP results, which it did.

    If the problem is collateral, then the means to address it is not through the banks (‘helping Wall Street’), but rather direct and unsterilized cash infusions to borrowers (helping ‘Main Street’). The intent is to repair collateral value directly, rather than through lowering interest rates. To that end, the government continues to hand out cash to borrowers (taxpayers, some other definition?) until meaningful inflation is generated, with risk tolerance to the upside. Because of the high propensity to pay down debt and material slack in the economy, this cash will make its way back into the banks, rather than into inflation.

    Barring that, interest rate policy will be ineffective, as demonstrated by the FFR falling to zero and staying there for 7-10 years (only twice has this happened since 1900: the Great Depression and, you guessed it, the Great Recession (the China Depression). FFR at zero is a key marker of a depression, by this way of thinking). With the FFR at zero for a prolonged period, the presumption is that real rates are still too high, ie, collateral is compromised. (Hence the whole debate over which Taylor Rule is appropriate.)

    Without assistance on reducing collateral, homeowners have to pay down debt bit by bit over many years, and they will become radicalized in the process because they are working just to make up for prior losses, rather than moving ahead (https://www.kellogg.northwestern.edu/faculty/van-straelen/index.htm#do_not_bookmark). As a practical matter, their household finances will be going backward until consumer credit bottoms.

    Paying down this debt (or restoring homeowner equity) takes a long time, in the case of the Great Recession, consumer credit falls until Q2 2013. This, for depression cycle dating, we use an asset / liability marker, in this case, consumer credit. Note that peak to trough consumer credit required about seven years. During this time, homeowners will perceive government policy — which is focused on interest rate remedies — as impotent. This discredits the elite and leads to the rise of populism, for homeowners, populist fascism.

    I think, but do not know, that the fascist period actually starts at the trough. That is, we often see populist unrest not when things are really bad, but when they start to get a bit better. For example, dictatorial regimes often collapse when they try to liberalize. Perhaps someone has better insight on this.

    But when does the fascist period end? I would argue that the fascist impulse — the desire to hunker down, to expel strangers and withdraw from international trade and agreements — peaked the day before Steve Bannon was fired, ie, August 2017. I would add that the balance of opinion towards Brexit also swung to ‘stay’ in August 2017. Real home prices reached their previous peak around this time, which should have the effect of ‘de-radicalizing’ homeowners. In this view, median voter theory would again apply at the end of the depressionary period (from Aug. 2017), and we should expect to see moderates winning elections again, which is exactly what we saw in November 2018.

    In any event, the multiplier on unsterilized fiscal injections is, in effect, infinite until the FFR can rise above the floor and inflation reaches some material level, call it 2.5-3.0%.

    Reply
    1. pgl

      2 cents is what your usual babble was worth the first time. Which is why everyone ignored it the first time and we will continue to ignore your babble.

      Reply
  17. tom

    Tough exam! I don’t see why you are still teaching AS/AD/IS/LM? The 3-equation model is much more salient.

    Also don’t understand question 2.3. What is MB? If central bank targets i, and there is no long run inflation, fiscal policy has same effect as in baseline model?

    Reply
    1. pgl

      MB = monetary base. B = government bonds held by the public. Most macro students would get when Menzie wrote “real wealth” = (MB + B)/P.

      Oh yea – P is the price level.

      Reply
    2. Moses Herzog

      @ tom
      Ignore IS-LM at your own peril. This in my NOT so humble opinion is one of the best posts ever in the history of blogging. And one of the best non-tehcnical writings in the history of economics. You might even read Keynes; work, but that man, as great as he was, had a knack for turning relatively simple topics into something complex. So Krugman may be the best source on IS-LM in that sense. Happy reading:
      https://krugman.blogs.nytimes.com/2011/10/09/is-lmentary/

      Reply
      1. pgl

        Maybe his point was that if the FED did whatever it took to get the real interest rate low enough to make sure the IS curve crossed this rate at full employment, then all the fuss over the banking sector is not all that relevant. I used to be deep in the weeds of how the banking sector should be incorporated into macromodels but this simplication is actually good modeling. Of course the MMT crowd never got that point.

        But I do appreciate how Menzie makes his students think through these things. I did when I taught macro. The good students loved it. The lazy hack students like Peaky did not but then I did not care what lazy hacks thought.

        Reply
      2. 2slugbaits

        Moses Herzog I believe tom was referring to the more up-to-date New Keynesian reworking of IS-LM as found in (for example) David Romer’s Advanced Macroeconomics textbook. Here’s a nice tutorial on the 3-Equation model:

        https://www.ucl.ac.uk/~uctpa36/3equation_2005_withtitle.pdf

        And strictly speaking, Krugman doesn’t actually rely upon the old Keynes/Hicks version of the IS-LM, although he often calls it that. In the original IS-LM model the LM curve represented equilibrium points along a liquidity curve in which the interest rate represented the rate faced by investors in productive capital; i.e., it was not the Federal Funds Rate. The LM curve was supposed to capture the trade-off between the demand for money and the liquidity of the bond. That was back when macroeconomists used to worry about the different motives for holding cash. My favorite old school “go to” book on the LM curve has always been David Laidler’s The Demand for Money: Theories and Evidence. Your post motivated me to go dig up my old, dusty, yellowed copy from college daze. I’m not sure it has much value today, but I always thought it was one of the better explorations of the IS-LM framework.

        Reply
  18. Willie

    I feel bad for 20 year old students. They will be 21 or 22 when the economy sputters. Into each life some rain must fall. But, timing is everything.

    Reply
  19. Not Trampis

    two things

    PGL is correct. ARRA was a failure because it was way too small. If public payrolls had risen like they did when Saint ronald of reagan was in office the recovery would have been a lot stronger. The private sector was actually quite strong.

    Adam Posen and someone else whom I cannot remember examined Japan to the death seeking confirmation of ricardian equivalence and simply could not find it.

    It is still a theory attempting to find evidence.

    Reply
    1. PeakTrader

      Barro made the prediction in 2009, although the article was written in 2010.

      In the article, “the Cato Institute’s Dan Mitchell calls the idea of Stimulus II: “the equivalent of putting perfume on a hog.””

      I also predicted it would fail, although it turned out even worse than I expected.

      Reply

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